One Metric To Rule Them All: CyrusOne Inc (NASDAQ:CONE)
CyrusOne Inc is a US$5.9b mid-cap, real estate investment trust (REIT) based in Dallas, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of CONE is unique and it has to adhere to different requirements compared to other non-REIT stocks. Below, I’ll look at a few important metrics to keep in mind as part of your research on CONE.
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Funds from Operations (FFO) is a higher quality measure of CONE’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For CONE, its FFO of US$290m makes up 66% of its gross profit, which means the majority of its earnings are high-quality and recurring.
Robust financial health can be measured using a common metric in the REIT investing world, FFO-to-debt. The calculation roughly estimates how long it will take for CONE to repay debt on its balance sheet, which gives us insight into how much risk is associated with having that level of debt on its books. With a ratio of 13%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take CONE 7.71 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
I also look at CONE’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 4.25x, it’s safe to say CONE is generating an appropriate amount of cash from its borrowings.
I also use FFO to look at CONE’s valuation relative to other REITs in United States by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In CONE’s case its P/FFO is 20.37x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
Next Steps:
As a REIT, CyrusOne offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in CONE, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for CONE’s future growth? Take a look at our free research report of analyst consensus for CONE’s outlook.
Valuation: What is CONE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CONE is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
