Public Storage (PSA) traded sharply lower yesterday–down nearly 19%–whacked by general market weakness and a downgrade from a Zack’s Research analyst. According to Zack’s, the downgrade was the result of PSA missing its third quarter estimate for funds from operations. The timing of this downgrade is odd as earnings were reported almost a month ago and the self-managed and self-administered Real Estate Investment Trust (REIT) specializing in self storage facilities had actually beaten consensus earnings estimates by 7%. Public Storage has an exceptionally strong balance sheet and the stock had held up extremely well up until yesterday. PSA closed on Monday a shade under $57 and is approaching its 52-week low of $52.52. This appears to be a justifiable entry point for this well managed company.
On November 7th Public Storage reported EPS of $1.37 which was 9 cents better than analysts had expected. Zack’s analysts seemed to be more exuberant than most as they estimated $1.30 for funds from operations; the actual result was only $1.09 because of currency losses. This is a comment from the Zack’s blog on the company:
“Operationally, PSA’s properties continue to perform relatively well: 3Q same-store NOI and rental rates increased in most of the company’s US markets. The company has plenty of cash to actively pursue acquisitions in a market where pricing for self-storage facilities is getting much more attractive.”
A modest miss on funds from operations seems a flimsy reason for a stock to drop almost 20% in one day, but we see no other news or corporate events to blame. We view unexplainable and exaggerated price declines such as this as an buying opportunity. We have a Public Storage rated Undervalued and like that the stock had, until yesterday, remained almost flat for the year in an otherwise brutal market environment. We believe that PSA has held up so well partly because of its low debt exposure, as the company has generally issued preferred stock in lieu of taking on debt. Right now companies that shun debt and continue to enjoy solid business growth (especially a REIT) should be priced at a premium. We like the company’s geographic diversity, as it has facilities throughout the U.S. and in seven European nations.
As much as we do not like to admit it, rising foreclosures are a reality in the housing crisis. One of the fundamental problems in our economy has been that Americans bought more house than they could afford when times were good. Now that times are tough, many homeowners are in over their head. Public Storage being the largest self storage company is uniquely positioned to take advantage of this sad phenomenon. As people are forced to downsize, many if not most, will need storage facilities for their extra furniture, etc.
Ockham views PSA’s current Cash Earnings multiple as significantly below its historical average, as calculated by our proprietary model. It is important to compare PSA’s current Cash Earnings multiple to that metric’s historical highs and lows in order to identify the current relative attractiveness of the stock to value investors. With a historical high Price-to-Cash Flow of 49.61x and a historical low Price-to-Cash Flow of 31.15x, an investor can determine where value becomes optimal. The current level of Price-to-Cash flow is just 12.5x–69% below its historical average. So, were PSA’s Price-to-Cash Flow multiple to return to the low end of its historically normal range an investor could expect to see significant price appreciation from current levels. If you are looking for a company with exposure to real estate but with a strong balance sheet and relatively little debt, then we believe–particularly after yesterday’s steep price decline–that Public Storage (PSA) fits the bill.