Overvalued Sun Communities (SUI) Sinks

Real Estate Investment Trusts company Sun Communities is taking Wall Street by surprise today, falling to $147.79 and marking a -5.55% change.

SUI currently sits within range of its analyst target price of $166.8, which implies that its price may remain stable for the near future.

Surprisingly, analysts give the stock an average rating of buy, which shows that they believe prices could continue to move. Over the last year, Sun Communities has underperfomed the S&P 500 by -7.68%, moving -16.18%.

Sun Communities's trailing 12 month P/E ratio is 72, based on its trailing EPS of $2.06.

As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US real estate companies is 24.81, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

To better understand SUI’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.

Sun Communities’s PEG is 29.63, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.

To get a sense of the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, Sun Communities's operating margins have averaged 60.742000000000004% and displayed a mean growth rate of -4.712%. These numbers show that the company has a relatively strong footing.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Sun Communities's free cash flow, which was $-212,300,000.00 as of its most recent annual report.

The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $-492,642,200.00 and they've been shrinking at an average rate of -6937.5%. SUI's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 2.29% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Sun communities's P/B ratio is 2.296 -- in other words, the market value of the company exceeds its book value by a factor of more than 2, so the company's assets may be overvalued compared to the average P/B ratio of the Real Estate sector, which stands at 2.24 as of the first quarter of 2023.

Sun Communities is likely overvalued at today's prices because it has an inflated P/E ratio, an average P/B ratio, and irregular and negative cash flows with a downwards trend. The stock has mixed growth prospects because of its strong operating margins with a stable trend, and an inflated PEG ratio.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.