One of Wall Street's biggest winners of the day is Extra Space Storage, a specialty real estate investment trust company whose shares have climbed 3.7% to a price of $147.59 -- 15.12% below its average analyst target price of $173.89.
The average analyst rating for the stock is hold. EXR may have outstripped the S&P 500 index by 3.0% so far today, but it has lagged behind the index by 32.5% over the last year, returning -9.1%.
Extra Space Storage Inc., headquartered in Salt Lake City, Utah, is a self-administered and self-managed REIT and a member of the S&P 500. 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.
Extra Space Storage's trailing 12 month P/E ratio is 39.5, based on its trailing EPS of $3.74. The company has a forward P/E ratio of 32.1 according to its forward EPS of $4.78 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US real estate companies is 31.12, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Extra Space Storage's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,402,474 | 100,181 | 1,302,293 | 10.73 |
| 2022 | 1,238,139 | 62,019 | 1,176,120 | 31.23 |
| 2021 | 952,436 | 56,226 | 896,210 | 27.31 |
| 2020 | 771,232 | 67,300 | 703,932 | 7.64 |
| 2019 | 707,686 | 53,717 | 653,969 | 5.97 |
| 2018 | 677,795 | 60,677 | 617,118 |
- Average free cash flow: $891.61 Million
- Average free cash flown growth rate: 15.4 %
- Coefficient of variability (the lower the better): 0.0 %
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 EXR have received an annualized dividend yield of 4.6% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by 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.
Extra Space Storage'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 2.15 as of the third quarter of 2024.
With a higher P/E ratio than its sector average, an average P/B ratio, and generally positive cash flows with an upwards trend, we can conclude that Extra Space Storage is probably overvalued at current prices. The stock presents mixed growth prospects because of its strong operating margins with a stable trend, and an inflated PEG ratio.
