One of Wall Street's biggest winners of the day is Equity Residential, a specialty real estate investment trust company whose shares have climbed 5.0% to a price of $61.09 -- near its average analyst target price of $63.14.
The average analyst rating for the stock is hold. EQR may have outstripped the S&P 500 index by 4.0% so far today, but it has lagged behind the index by 25.2% over the last year, returning -9.0%.
Equity Residential is committed to creating communities where people thrive. The company is part of the real estate sector, which is mostly composed of REITs (Real Estate Investment Trusts). But there are a few real estate development and service companies included in the sector as well. While the value of REIT tracks the value of underlying investments in real property, the value of shares in real estate companies depends not only on the economic factors affecting the real estate market generally, but also investor perceptions regarding the future of the company.
Equity Residential's trailing 12 month P/E ratio is 35.1, based on its trailing EPS of $1.74. The company has a forward P/E ratio of 38.9 according to its forward EPS of $1.57 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the real estate sector has an average P/E ratio of 25.55, and the average for the S&P 500 is 15.97.
EQR’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Equity Residential, we obtain a PEG ratio of 2.1, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
Equity Residential's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,523,052 | 87,635 | 1,435,417 | 6.69 |
| 2022 | 1,454,756 | 109,345 | 1,345,411 | 27.68 |
| 2021 | 1,260,184 | 206,421 | 1,053,763 | 1.79 |
| 2020 | 1,265,536 | 230,332 | 1,035,204 | -17.93 |
| 2019 | 1,456,984 | 195,692 | 1,261,292 | 8.01 |
| 2018 | 1,356,295 | 188,501 | 1,167,794 |
- Average free cash flow: $1.22 Billion
- Average free cash flown growth rate: 2.7 %
- Coefficient of variability (lower numbers indicating more stability): 372.59 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in EQR have received an annualized dividend yield of 4.5% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Equity Residential's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2, so the company's assets may be overvalued compared to the average P/B ratio of the Real Estate sector, which stands at 2.1 as of the first quarter of 2023.
With an inflated P/E ratio, an average P/B ratio, and irregular cash flows with a flat trend, we can conclude that Equity Residential is probably overvalued at current prices. The stock presents poor growth indicators because of its no published profit margins with a unknown rate of growth, and a negative PEG ratio.
