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MGM Growth Properties LLC Stock Is Estimated To Be Significantly Overvalued

·4 min read

- By GF Value

The stock of MGM Growth Properties LLC (NYSE:MGP, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $35.24 per share and the market cap of $9.3 billion, MGM Growth Properties LLC stock gives every indication of being significantly overvalued. GF Value for MGM Growth Properties LLC is shown in the chart below.


MGM Growth Properties LLC Stock Is Estimated To Be Significantly Overvalued
MGM Growth Properties LLC Stock Is Estimated To Be Significantly Overvalued

Because MGM Growth Properties LLC is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.

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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. MGM Growth Properties LLC has a cash-to-debt ratio of 0.03, which is worse than 72% of the companies in REITs industry. The overall financial strength of MGM Growth Properties LLC is 3 out of 10, which indicates that the financial strength of MGM Growth Properties LLC is poor. This is the debt and cash of MGM Growth Properties LLC over the past years:

MGM Growth Properties LLC Stock Is Estimated To Be Significantly Overvalued
MGM Growth Properties LLC Stock Is Estimated To Be Significantly Overvalued

Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. MGM Growth Properties LLC has been profitable 5 years over the past 10 years. During the past 12 months, the company had revenues of $777.4 million and earnings of $1.39 a share. Its operating margin of 65.10% better than 77% of the companies in REITs industry. Overall, GuruFocus ranks MGM Growth Properties LLC's profitability as poor. This is the revenue and net income of MGM Growth Properties LLC over the past years:

MGM Growth Properties LLC Stock Is Estimated To Be Significantly Overvalued
MGM Growth Properties LLC Stock Is Estimated To Be Significantly Overvalued

Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. MGM Growth Properties LLC's 3-year average revenue growth rate is in the bottom 10% of the companies in REITs industry. MGM Growth Properties LLC's 3-year average EBITDA growth rate is -21%, which ranks worse than 80% of the companies in REITs industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, MGM Growth Properties LLC's return on invested capital is 4.92, and its cost of capital is 6.25. The historical ROIC vs WACC comparison of MGM Growth Properties LLC is shown below:

MGM Growth Properties LLC Stock Is Estimated To Be Significantly Overvalued
MGM Growth Properties LLC Stock Is Estimated To Be Significantly Overvalued

Overall, the stock of MGM Growth Properties LLC (NYSE:MGP, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks worse than 80% of the companies in REITs industry. To learn more about MGM Growth Properties LLC stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.