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Wed. Oct. 1, 2008

Stock Analysis: ProLogis (PLD) Priced for a Buy? *

Linked here is a PDF copy of my detailed analysis of ProLogis (PLD). Below are some highlights from the above linked analysis:

Company Description: ProLogis a real estate investment trust (formerly ProLogis Trust) is the largest publicly held, U.S.-based owner and operator of distribution facilities, with operations in North America, Europe and Asia.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number

PLD is trading at a discount to 1.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, PLD is trading at a 26.5% discount. PLD earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.

PLD earned two Stars in this section for 3.) and 4.) above. PLD has paid a cash dividend to shareholders every year since 1994 and has increased its dividend payments for 14 consecutive years. It’s one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

  1. NPV MMA Diff.
  2. Years to >MMA

PLD earned one Star in this section for 2.) above. The NPV MMA Diff. of the $5,577 is below the $7,500 minimum I look for in a stock that has increased dividends as long as PLD has. PLD’s current yield of 5.17% exceeds the 4.61% estimated 20-year average MMA rate.

Other: PLD is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company’s position as one of the largest owners of global distribution facilities, which are becoming increasingly important to global companies looking to increase efficiency. In addition, PLD has been successful in the property funds business, which allows it to expand its portfolio and collect management fees while using capital from institutional investors.

Conclusion: PLD earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks PLD as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $36.62 before PLD’s NPV MMA Diff. increases to the $7,500 NPV MMA Diff. that I like to see. At that price PLD would yield 5.66%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $7,500 NPV MMA Differential I’m looking for, the calculated rate is 5.5%. This dividend growth rate is slightly higher than the 4.3% used in this analysis.

PLD’s industry position, its broad geographic and customer diversification and a strong balance sheet make it a compelling stock. It is a company I would be comfortable initiating a position in on dips below $38.45, which is close to its Graham number of $38.35.

Disclaimer:
Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I had no position in PLD (0.0% of my Income Portfolio) .

What are your thoughts on PLD?


6 Responses to “Stock Analysis: ProLogis (PLD) Priced for a Buy? *”

  1. Jake (Dividend Blog) says:

    Hey D4L,

    I have owned Prologis for a long time. The stock price has pulled back over the last six months which provides for a great buying opportunity. They are growing internationally in order to spread risk. Good call.

    )

  2. Richard Woon says:

    I like you blog but I respectfully disagree as I believe that you have focused on the income side but not the debt. This company is way overleveraged. I think it will end up like Lehman, Bear etc.

    I’ve done a comprehensive analysis of ProLogis at my blog:

    http://www.stripnomics.com

    I would love to get your take, good or bad.

  3. Anonymous says:

    If the economy does slow down, wouldn’t it seam reasonable the industrial space would not be in as much demand?

  4. Dividends4Life says:

    Jake: It appears to be a promising stock. I am still looking at it.

    Richard: You bring up an important issue of debt and the ability to service it. If you look at the last 10-years (98-07), free cash flow as a percent of total debt averaged 14.6%. 2007 ended at 11.7%, up from 2005 (7.5%) and 2006 (8.6%).

    I am still learning about the company. Do you anticipate a future decline in fcf that would make servicing the debt problematic?

    You seem knowledgeable about the company. What is your relationship to it?

    Best Wishes,
    D4L

  5. Richard Woon says:

    I actually have no ties to the company but I’m a commercial real estate attorney in the Silicon Valley. Trust me, the commercial market is horrible and getting worse.

    Right now, levered free cash flows for PLD are -$780M. That’s right – NEGATIVE. Further, PLD did the same thing home speculators did – refinance, refinance, refinance.

    I wouldn’t touch the common stock. The preferred might be ok – the yield is much higher but I just get a bad feeling about the company in general.

    I have about 15 posts on my blog about ProLogis – please give me your comments.

  6. Anonymous says:

    WOW What a deal on PLD this morning, 11.75 was the low…So do you think its a deal now after your analysis less than a month ago….

    Better to stay with your day job…