Standing out among the Street's worst performers today is Digital Realty Trust, a specialty real estate investment trust company whose shares slumped -4.1% to a price of $164.93, 12.87% below its average analyst target price of $189.29.
The average analyst rating for the stock is buy. DLR underperformed the S&P 500 index by -2.0% during today's afternoon session, but outpaced it by 4.6% over the last year with a return of 24.8%.
Digital Realty brings companies and data together by delivering the full spectrum of data center, colocation, and interconnection solutions. PlatformDIGITAL, the company's global data center platform, provides customers with a secure data meeting place and a proven Pervasive Datacenter Architecture (PDx) solution methodology for powering innovation and efficiently managing Data Gravity challenges. 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.
Digital Realty Trust's trailing 12 month P/E ratio is 101.8, based on its trailing EPS of $1.62. The company has a forward P/E ratio of 68.3 according to its forward EPS of $1.21 -- 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.
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 Digital Realty Trust's free cash flow, which was $-1890818000 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 $-652253166.7 and they've been growing at an average rate of -13.3%. DLR'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 2.8% 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. Digital realty trust's P/B ratio is 2.69 -- 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 2.15 as of the third quarter of 2024.
Since it has a higher P/E ratio than its sector average, an average P/B ratio, and negative cash flows with a downwards trend, Digital Realty Trust is likely overvalued at today's prices. The company has mixed growth prospects because of an inflated PEG ratio and weak operating margins with a negative growth trend. We hope you enjoyed this overview of DLR's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
