- By GF Value
The stock of NexPoint Residential Trust (NYSE:NXRT, 30-year Financials) is estimated to be fairly valued, 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 $46.62 per share and the market cap of $1.2 billion, NexPoint Residential Trust stock gives every indication of being fairly valued. GF Value for NexPoint Residential Trust is shown in the chart below.
Because NexPoint Residential Trust is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 6.4% over the past five years.
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. NexPoint Residential Trust has a cash-to-debt ratio of 0.02, which is worse than 80% of the companies in REITs industry. The overall financial strength of NexPoint Residential Trust is 3 out of 10, which indicates that the financial strength of NexPoint Residential Trust is poor. This is the debt and cash of NexPoint Residential Trust over the past years:
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. NexPoint Residential Trust has been profitable 4 years over the past 10 years. During the past 12 months, the company had revenues of $204.8 million and earnings of $1.72 a share. Its operating margin of 6.62% worse than 88% of the companies in REITs industry. Overall, GuruFocus ranks NexPoint Residential Trust's profitability as fair. This is the revenue and net income of NexPoint Residential Trust over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of NexPoint Residential Trust is 6.4%, which ranks better than 77% of the companies in REITs industry. The 3-year average EBITDA growth rate is 0.9%, which ranks in the middle range of the companies in REITs industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, NexPoint Residential Trust's return on invested capital is 0.70, and its cost of capital is 4.67. The historical ROIC vs WACC comparison of NexPoint Residential Trust is shown below:
Overall, the stock of NexPoint Residential Trust (NYSE:NXRT, 30-year Financials) is believed to be fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in REITs industry. To learn more about NexPoint Residential Trust stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.