Today we have a speculative idea: take shares of REIT Prologis (NYSE: PLD), in order to make money on the frenzied growth in demand for warehouses.
Growth potential and validity: 15% behind 17 months excluding dividends; 9% per annum during 15 years including dividends.
Why stocks can go up: because the company is well established – and at the same time is engaged in business diversification.
How do we act: take now 145,5 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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What the company makes money on
Prologis is a REIT, which invests in warehouses and logistics infrastructure. REIT is obliged to distribute most of the profits in the form of dividends to shareholders. We published an investment idea for the company, in which her business is analyzed in detail. And in principle, there is nothing to repeat here - we have already received the main information.: Prologis is "warehouses with dividends".
Arguments in favor of the company
Fell down. Since December, the stock has fallen significantly from 168 to 145,5 $. In view of the circumstances described below, I think, that we can expect a rebound.
Again on the new. Our last investment idea was a success, giving more 60% in the absolute without taking into account dividends less than for 15 Months. And it is quite reasonable to invest in the company again.
The logistics boom has not only not weakened, but even intensified. Recent events with a ban on flights in the airspace of the Russian Federation will also increase the demand for storage capacity. But even without this, the demand for warehouses grew., is growing and will continue to grow both due to the growth of e-commerce, and in connection with the restructuring of logistics chains by companies in the context of an eternal pandemic.
The company's shares may well grow due to the withdrawal of investors from office or retail lease projects and their transition to the field of logistics. The world has fallen deep into the hell of an eternal pandemic., and doubtful, that offices and shops will be a good investment of capital. But in the case of REITs like Prologis, there are real prospects for growth in dividend yields..
Stability. The level of occupancy of the leased space at the company is 97,4%. This gives its business stability..
Diversification. Now the largest client of the company in the lease — Amazon. He gives very little - only 7% from the company's rental revenue. The next big customer, FedEx, only gives 2,1% rental proceeds. In total, the largest 10 customers of the company give it only 16,7% Rental. And the largest 25 customers are given to her only 22,5% Rental. In general, we can say, that the company has a very high level of diversification of customers and only the departure of Amazon can create real problems for it.
If you forget about Amazon, then prologis' negotiating position looks very strong – and allows us to hope for a tangible increase in its profits due to an increase in rents..
A little more diversification. The main income of the company is rent. But approximately 12% revenue is brought by services for the maintenance of leased areas. Prologis recently reported, what plans to develop the services segment, among other things, through the installation of solar panels and automation.
These are all highly relevant initiatives.: solar energy will be stimulated by the growth of prices for traditional hydrocarbon energy sources, and automation is an extremely relevant topic for the United States and Europe due to the unprecedented increase in the cost of labor there..
Do not hope for a powerful growth in the services segment at Prologis here and now, but over long distances, this will distinguish the company from other REITs., a simple business model that rests on the principle of "let's just rent out warehouses and do nothing". I think, that in the future 7-8 years the "service" business of the company, may be, it will even be possible to allocate a separate issuer, which will bring a lot of joy to Prologis shareholders.
What can get in the way
Logistic boom. Now a lot of money is invested in the construction of warehouses. Demand here will be ahead of supply for a long time., and the very fact of growth in supply in this market will slow down the growth rate of rents..
The main danger here seems to me to be, surprisingly, a powerful drop in income from office rent: a lot of capital is concentrated in this area and its owners have a great temptation to withdraw it from the unpromising and stagnant office business into the construction of warehouses.. "You're renting out offices., my mother's friend's son invested in the warehouse, and he's doing well.". This will greatly increase the volume of supply in the logistics market and negatively affect the growth of Prologis' financial performance..
Dividends. Even after the recent increase in payments by 25%, which was up to 3.16 $ per share per year, the dividend yield of Prologis shares is only 2,16% per annum. Basically, it's not so little. But, Considering, that most of the company's space has already been commissioned, and the potential for rent increases for current customers is somewhat limited., don't be hopeful, that in the coming year the company will be able to dramatically increase profits and, respectively, Dividends. In terms of passive profitability, now Prologis does not give so much.
Accounting. The company has a huge amount of debts - 20.744 billion, but there is only 556.1 million money in the accounts. Such a large debt will scare off investors – and after all, it, probably, will grow, because the company needs to repair existing warehouses. She also invests a lot in expanding the business..
All in all, the amount of Prologis debts will remain at a high level for a long time and, probably, grow. That's a worry in an era of rising rates.: the company's ability to pay dividends may be at risk.
Not that cheap. Even after the drop in quotations, the company is worth a lot.: P / E in her neighborhood 36. But in the case of REIT, it is better to look at the following parameter - the ratio of the value of shares and profit from operations.. This indicator in Prologis — 34,07: 145,5 by 4.27 $ per share. It's not crazy much., but a lot. All in all, the company is not cheap and the shares here can be a little shocking.
What's the bottom line?
Shares can be taken now by 145,5 $. And then there are two options:
- wait for the stock to return to the level 168 $. Think, that it we will achieve in the next 17 Months;
- keep shares next 15 years.
