Innovative Industrial Properties Stock Gives Every Indication Of Being Modestly Overvalued
- By GF Value
The stock of Innovative Industrial Properties (NYSE:IIPR, 30-year Financials) shows every sign of being modestly overvalued, 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 $181.27 per share and the market cap of $4.3 billion, Innovative Industrial Properties stock shows every sign of being modestly overvalued. GF Value for Innovative Industrial Properties is shown in the chart below.
Because Innovative Industrial Properties is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 46.5% over the past five years.
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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. Innovative Industrial Properties has a cash-to-debt ratio of 0.88, which ranks better than 89% of the companies in REITs industry. Based on this, GuruFocus ranks Innovative Industrial Properties's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Innovative Industrial Properties over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Innovative Industrial Properties has been profitable 3 years over the past 10 years. During the past 12 months, the company had revenues of $138.7 million and earnings of $3.55 a share. Its operating margin of 61.40% better than 71% of the companies in REITs industry. Overall, GuruFocus ranks Innovative Industrial Properties's profitability as poor. This is the revenue and net income of Innovative Industrial Properties over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Innovative Industrial Properties is 46.5%, which ranks better than 97% of the companies in REITs industry. The 3-year average EBITDA growth rate is 173.7%, which ranks better than 99% of the companies in REITs industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Innovative Industrial Properties's return on invested capital is 7.50, and its cost of capital is 11.02. The historical ROIC vs WACC comparison of Innovative Industrial Properties is shown below:
In summary, the stock of Innovative Industrial Properties (NYSE:IIPR, 30-year Financials) appears to be modestly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 99% of the companies in REITs industry. To learn more about Innovative Industrial Properties stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
