On Oct 8, 2013, we reaffirmed our long-term recommendation on Taubman Centers Inc. (TCO) at Neutral. The decision reflects the company’s decent second-quarter results, successful portfolio strengthening and shareholders’ wealth enhancement efforts. Yet, rising customer purchases through catalogs and the Internet, increasing interest rates along with capital market volatility and tough competition remain our plausible concerns.
Why the Neutral Stance?
Taubman, whose dominant retail malls command the highest average sales productivity in the U.S., is currently focusing on expanding through development and reconstruction of properties in major submarkets across the world. Consequently, in August, as previously planned, Taubman opened its 1st Prestige Outlet in Missouri. Also, the company boasts a cluster of industry leading tenants such as The Gap, Inc. (GPS) and L Brands, Inc. (LTD), which are well-capitalized retailers.
Moreover, this retail real estate investment trust (:REIT) has established an impressive track record in conservative capital management and returning cash to shareholders. Notably, the company never reduced its common dividend since it went public in 1992 but has, on the other hand, hiked its payout 16 times. Additionally, Taubman recently initiated a $200 million share buyback program.
However, Taubman’s second-quarter 2013 FFO per share of 75 cents missed the Zacks Consensus Estimate by 5.1% due to the lower-than-expected revenue generated in the quarter. Nevertheless, the decline in expenses offset the fall in revenues, which brought some relief and the company’s FFO per share rose 2.7% year over year.
Yet, Taubman’s international presence often exposes it to unfavorable foreign currency movements, impacting its top-line growth. Also, amid the technological advancements, there is a significant rise in online shopping through the Internet, mobile phones and tablets.
This in turn affects the demand for physical stores and thereby adversely affects the demand for Taubman’s properties. Alongside, rising interest rates leads to a rise in the company’s cost of borrowing.
Over the last 60 days, the Zacks Consensus Estimate for 2013 FFO per share dipped 0.3% to $3.61. Also, for 2014 it declined by 0.5% to $3.83. Consequently, Taubman now has a Zacks Rank #4 (Sell).
Taubman is scheduled to release its third-quarter 2013 earnings after the market closes on Oct 24. The Zacks Consensus Estimate for FFO per share for the upcoming quarter is pegged at 87 cents per share, depicting a year-over-year increase of 10.4%.
Other Stocks to Consider
REITs that are performing better than Taubman include The Macerich Company (MAC), carrying a Zacks Rank #2 (Buy).
Note: Funds from operations, a widely accepted and reported measure of REITs performance, are derived by adding depreciation, amortization and other non-cash expenses to net income.