City Office REIT Stock Shows Every Sign Of Being Fairly Valued

GuruFocus.com
·4 min read

- By GF Value

The stock of City Office REIT (NYSE:CIO, 30-year Financials) is believed to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $11.3 per share and the market cap of $490.4 million, City Office REIT stock gives every indication of being fairly valued. GF Value for City Office REIT is shown in the chart below.


City Office REIT Stock Shows Every Sign Of Being Fairly Valued
City Office REIT Stock Shows Every Sign Of Being Fairly Valued

Because City Office REIT is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. City Office REIT has a cash-to-debt ratio of 0.04, which ranks in the middle range of the companies in REITs industry. Based on this, GuruFocus ranks City Office REIT's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of City Office REIT over the past years:

City Office REIT Stock Shows Every Sign Of Being Fairly Valued
City Office REIT Stock Shows Every Sign Of Being Fairly Valued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. City Office REIT has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $160.8 million and loss of $0.06 a share. Its operating margin is 19.57%, which ranks worse than 77% of the companies in REITs industry. Overall, the profitability of City Office REIT is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of City Office REIT over the past years:

City Office REIT Stock Shows Every Sign Of Being Fairly Valued
City Office REIT Stock Shows Every Sign Of Being Fairly Valued

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of City Office REIT is -1.1%, which ranks in the middle range of the companies in REITs industry. The 3-year average EBITDA growth is -5.4%, which ranks in the middle range of the companies in REITs industry.

One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, City Office REIT's ROIC is 2.72 while its WACC came in at 7.27. The historical ROIC vs WACC comparison of City Office REIT is shown below:

City Office REIT Stock Shows Every Sign Of Being Fairly Valued
City Office REIT Stock Shows Every Sign Of Being Fairly Valued

In summary, City Office REIT (NYSE:CIO, 30-year Financials) stock is believed to be fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in REITs industry. To learn more about City Office REIT stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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