Most analysts love Gaming and Leisure Properties, which has an average rating of buy. But there's reason to believe the stock may be overvalued at today's price of $51.12 per share. Let's look at the fundamentals ourselves and see if we reach a different conclusion than the analyst community.
The first step in determining whether a stock is overvalued is to check its price to book (P/B) ratio. This is perhaps the most basic measure of a company's valuation, which is its market value divided by its book value. Book value refers to the sum of all of the company's tangible assets minus its liabilities -- you can also think of it as the company's liquidation value.
Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Gaming and Leisure Properties is 4.5, compared to its sector average of 2.39 and the S&P 500's average P/B of 2.95.
Modernly, the most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 51.12 divided by either its trailing or forward earnings, which for Gaming and Leisure Properties are $2.39 and $2.36 respectively. Based on these values, the company's trailing P/E ratio is 21.4 and its forward P/E ratio is 21.7. By way of comparison, the average P/E ratio of the Real Estate sector is 27.16 and the average P/E ratio of the S&P 500 is 15.97.
Indebted or mismanaged companies can't sustain shareholder value for long, even if they have strong earnings. For this reason, considering Gaming and Leisure Properties's ability to meet its debt obligations is also an important aspect of pinning down its valuation. By adding up its current assets, then subtracting its inventory and prepaid expenses, and then dividing the whole by its current liabilities, we obtain the company's Quick Ratio of 19.57. Since GLPI's quick ratio is higher than 1, its total liquid assets are sufficient to meets its current liabilities.
Shares of Gaming and Leisure Properties appear to be overvalued at today's prices — despite the positive outlook from analysts. But sometimes stocks with inflated valuations turn out to be strong performances for years, and even decades, such as Amazon. So be sure to do your own due diligence if you are interested in taking a long position in GLPI.