The stock of Empire State Realty OP LP (ESBA) experienced a daily loss of 4.3%, with a 3-month gain of 29.95%. Its Earnings Per Share (EPS) stands at 0.29. The question that arises is: Is the stock modestly undervalued? This article aims to provide a valuation analysis of the company. We invite you to delve into this comprehensive analysis of Empire State Realty OP LP’s intrinsic value.
Introducing Empire State Realty OP LP
Empire State Realty OP LP is the operating partner of Empire State Realty Inc. The company manages, operates, acquires, and repositions properties in Manhattan and the greater New York metropolitan area. It operates in two segments, Real Estate and Observatory, generating maximum revenue from the Real Estate segment. The company’s stock price currently stands at $8.45, while its GF Value, an estimation of fair value, is $9.75.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. The GF Value Line gives an overview of the fair value at which the stock should ideally be traded. It is calculated based on historical multiples, a GuruFocus adjustment factor based on the company’s past returns and growth, and future estimates of the business performance.
When the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $8.45 per share, Empire State Realty OP LP’s stock appears to be modestly undervalued.
Given that Empire State Realty OP LP is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
Empire State Realty OP LP’s Financial Strength
Before investing in a company, it’s crucial to check its financial strength. Investing in companies with poor financial strength carries a higher risk of permanent loss. A great way to understand the financial strength of a company is by looking at the cash-to-debt ratio and interest coverage. Empire State Realty OP LP has a cash-to-debt ratio of 0.14, which is better than 71.05% of 722 companies in the REITs industry. However, the overall financial strength of Empire State Realty OP LP is 4 out of 10, indicating that its financial strength is relatively poor.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. Empire State Realty OP LP has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $720.20 million and Earnings Per Share (EPS) of $0.29. Its operating margin is 19.18%, ranking worse than 81.46% of 669 companies in the REITs industry. Overall, GuruFocus ranks the profitability of Empire State Realty OP LP at 7 out of 10, indicating fair profitability.
One of the most important factors in the valuation of a company is growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Empire State Realty OP LP is 3.1%, which ranks better than 60.25% of 634 companies in the REITs industry. The 3-year average EBITDA growth is 6.9%, ranking better than 64.37% of 536 companies in the REITs industry.
ROIC vs WACC
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, Empire State Realty OP LP’s return on invested capital is 3.54, and its cost of capital is 10.38.
In conclusion, the stock of Empire State Realty OP LP (ESBA) appears to be modestly undervalued. The company’s financial condition is poor, and its profitability is fair. Its growth ranks better than 64.37% of 536 companies in the REITs industry. To learn more about Empire State Realty OP LP stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.