Intrinsic value of Gladstone Commercial - GOOD

Previous Close

$23.01

  Intrinsic Value

$2.80

stock screener

  Rating & Target

str. sell

-88%

  Value-price divergence*

+15%

Previous close

$23.01

 
Intrinsic value

$2.80

 
Up/down potential

-88%

 
Rating

str. sell

 
Value-price divergence*

+15%

Our model is not good at valuating stocks of financial companies, such as GOOD.

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of GOOD stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.38
  9.50
  9.05
  8.64
  8.28
  7.95
  7.66
  7.39
  7.15
  6.94
  6.74
  6.57
  6.41
  6.27
  6.14
  6.03
  5.93
  5.83
  5.75
  5.68
  5.61
  5.55
  5.49
  5.44
  5.40
  5.36
  5.32
  5.29
  5.26
  5.24
  5.21
Revenue, $m
  86
  94
  103
  112
  121
  130
  140
  151
  162
  173
  184
  197
  209
  222
  236
  250
  265
  280
  297
  313
  331
  349
  368
  389
  410
  431
  454
  478
  504
  530
  558
Variable operating expenses, $m
 
  57
  62
  67
  73
  79
  85
  91
  98
  105
  112
  119
  127
  134
  143
  151
  160
  170
  179
  190
  200
  211
  223
  235
  248
  261
  275
  289
  305
  321
  337
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  56
  57
  62
  67
  73
  79
  85
  91
  98
  105
  112
  119
  127
  134
  143
  151
  160
  170
  179
  190
  200
  211
  223
  235
  248
  261
  275
  289
  305
  321
  337
Operating income, $m
  31
  37
  41
  44
  48
  52
  55
  60
  64
  68
  73
  78
  83
  88
  93
  99
  105
  111
  117
  124
  131
  138
  146
  153
  162
  170
  180
  189
  199
  209
  220
EBITDA, $m
  69
  79
  86
  93
  101
  109
  118
  126
  135
  145
  155
  165
  175
  186
  198
  210
  222
  235
  248
  263
  277
  293
  309
  326
  343
  361
  381
  401
  422
  444
  467
Interest expense (income), $m
  25
  24
  26
  29
  31
  34
  37
  40
  43
  46
  49
  53
  56
  60
  64
  68
  72
  77
  81
  86
  91
  96
  101
  107
  113
  119
  126
  132
  139
  147
  155
Earnings before tax, $m
  4
  13
  14
  15
  16
  17
  19
  20
  21
  22
  23
  25
  26
  28
  29
  31
  33
  34
  36
  38
  40
  42
  44
  46
  49
  51
  54
  57
  60
  63
  66
Tax expense, $m
  0
  4
  4
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  15
  16
  17
  18
Net income, $m
  4
  10
  10
  11
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  23
  24
  25
  26
  28
  29
  31
  32
  34
  36
  37
  39
  41
  43
  46
  48

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  5
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  852
  923
  1,007
  1,094
  1,184
  1,279
  1,376
  1,478
  1,584
  1,694
  1,808
  1,927
  2,050
  2,179
  2,313
  2,452
  2,598
  2,749
  2,907
  3,072
  3,245
  3,425
  3,613
  3,809
  4,015
  4,230
  4,455
  4,691
  4,938
  5,196
  5,467
Adjusted assets (=assets-cash), $m
  847
  923
  1,007
  1,094
  1,184
  1,279
  1,376
  1,478
  1,584
  1,694
  1,808
  1,927
  2,050
  2,179
  2,313
  2,452
  2,598
  2,749
  2,907
  3,072
  3,245
  3,425
  3,613
  3,809
  4,015
  4,230
  4,455
  4,691
  4,938
  5,196
  5,467
Revenue / Adjusted assets
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
  0.102
Average production assets, $m
  785
  859
  937
  1,018
  1,102
  1,190
  1,281
  1,375
  1,474
  1,576
  1,682
  1,793
  1,908
  2,027
  2,152
  2,282
  2,417
  2,558
  2,705
  2,859
  3,019
  3,186
  3,361
  3,544
  3,736
  3,936
  4,145
  4,365
  4,594
  4,835
  5,087
Working capital, $m
  0
  -5
  -6
  -6
  -7
  -8
  -8
  -9
  -9
  -10
  -11
  -11
  -12
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -23
  -24
  -25
  -26
  -28
  -29
  -31
  -32
Total debt, $m
  509
  558
  611
  667
  725
  785
  848
  913
  980
  1,050
  1,123
  1,199
  1,278
  1,360
  1,446
  1,535
  1,628
  1,725
  1,826
  1,931
  2,041
  2,156
  2,276
  2,402
  2,534
  2,671
  2,815
  2,966
  3,123
  3,288
  3,461
Total liabilities, $m
  541
  590
  643
  699
  757
  817
  880
  945
  1,012
  1,082
  1,155
  1,231
  1,310
  1,392
  1,478
  1,567
  1,660
  1,757
  1,858
  1,963
  2,073
  2,188
  2,308
  2,434
  2,566
  2,703
  2,847
  2,998
  3,155
  3,320
  3,493
Total equity, $m
  311
  333
  363
  395
  428
  462
  497
  534
  572
  611
  653
  696
  740
  787
  835
  885
  938
  992
  1,050
  1,109
  1,171
  1,236
  1,304
  1,375
  1,449
  1,527
  1,608
  1,693
  1,783
  1,876
  1,974
Total liabilities and equity, $m
  852
  923
  1,006
  1,094
  1,185
  1,279
  1,377
  1,479
  1,584
  1,693
  1,808
  1,927
  2,050
  2,179
  2,313
  2,452
  2,598
  2,749
  2,908
  3,072
  3,244
  3,424
  3,612
  3,809
  4,015
  4,230
  4,455
  4,691
  4,938
  5,196
  5,467
Debt-to-equity ratio
  1.637
  1.670
  1.680
  1.690
  1.700
  1.700
  1.710
  1.710
  1.710
  1.720
  1.720
  1.720
  1.730
  1.730
  1.730
  1.730
  1.740
  1.740
  1.740
  1.740
  1.740
  1.740
  1.750
  1.750
  1.750
  1.750
  1.750
  1.750
  1.750
  1.750
  1.750
Adjusted equity ratio
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361
  0.361

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  4
  10
  10
  11
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  23
  24
  25
  26
  28
  29
  31
  32
  34
  36
  37
  39
  41
  43
  46
  48
Depreciation, amort., depletion, $m
  38
  42
  45
  49
  53
  58
  62
  67
  72
  77
  82
  87
  93
  98
  104
  111
  117
  124
  131
  139
  147
  155
  163
  172
  181
  191
  201
  212
  223
  235
  247
Funds from operations, $m
  38
  51
  56
  61
  65
  70
  76
  81
  87
  93
  99
  105
  112
  119
  126
  133
  141
  149
  158
  166
  176
  185
  195
  206
  217
  229
  241
  253
  267
  280
  295
Change in working capital, $m
  -3
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
Cash from operations, $m
  41
  52
  56
  61
  66
  71
  76
  82
  87
  93
  99
  106
  113
  119
  127
  134
  142
  150
  159
  167
  177
  186
  197
  207
  218
  230
  242
  255
  268
  282
  297
Maintenance CAPEX, $m
  0
  -38
  -42
  -45
  -49
  -53
  -58
  -62
  -67
  -72
  -77
  -82
  -87
  -93
  -98
  -104
  -111
  -117
  -124
  -131
  -139
  -147
  -155
  -163
  -172
  -181
  -191
  -201
  -212
  -223
  -235
New CAPEX, $m
  -72
  -75
  -78
  -81
  -84
  -88
  -91
  -95
  -98
  -102
  -106
  -111
  -115
  -120
  -125
  -130
  -135
  -141
  -147
  -154
  -160
  -167
  -175
  -183
  -191
  -200
  -210
  -219
  -230
  -241
  -252
Cash from investing activities, $m
  -59
  -113
  -120
  -126
  -133
  -141
  -149
  -157
  -165
  -174
  -183
  -193
  -202
  -213
  -223
  -234
  -246
  -258
  -271
  -285
  -299
  -314
  -330
  -346
  -363
  -381
  -401
  -420
  -442
  -464
  -487
Free cash flow, $m
  -18
  -61
  -63
  -65
  -68
  -70
  -73
  -75
  -78
  -80
  -83
  -86
  -89
  -93
  -96
  -100
  -104
  -108
  -113
  -117
  -122
  -128
  -133
  -139
  -145
  -152
  -159
  -166
  -174
  -182
  -190
Issuance/(repayment) of debt, $m
  -16
  49
  53
  56
  58
  60
  63
  65
  68
  70
  73
  76
  79
  82
  86
  89
  93
  97
  101
  105
  110
  115
  120
  126
  131
  137
  144
  151
  158
  165
  173
Issuance/(repurchase) of shares, $m
  80
  18
  20
  20
  21
  21
  22
  22
  23
  23
  24
  25
  25
  26
  27
  28
  29
  30
  31
  32
  33
  34
  36
  37
  39
  40
  42
  44
  46
  48
  50
Cash from financing (excl. dividends), $m  
  59
  67
  73
  76
  79
  81
  85
  87
  91
  93
  97
  101
  104
  108
  113
  117
  122
  127
  132
  137
  143
  149
  156
  163
  170
  177
  186
  195
  204
  213
  223
Total cash flow (excl. dividends), $m
  42
  6
  10
  11
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  33
Retained Cash Flow (-), $m
  -77
  -27
  -30
  -31
  -33
  -34
  -35
  -37
  -38
  -40
  -41
  -43
  -45
  -46
  -48
  -50
  -52
  -55
  -57
  -60
  -62
  -65
  -68
  -71
  -74
  -78
  -81
  -85
  -89
  -93
  -98
Prev. year cash balance distribution, $m
 
  5
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -16
  -20
  -21
  -22
  -23
  -24
  -24
  -25
  -26
  -27
  -29
  -30
  -31
  -32
  -34
  -35
  -36
  -38
  -40
  -41
  -43
  -45
  -47
  -49
  -52
  -54
  -57
  -59
  -62
  -65
Discount rate, %
 
  10.10
  10.61
  11.14
  11.69
  12.28
  12.89
  13.53
  14.21
  14.92
  15.67
  16.45
  17.27
  18.14
  19.05
  20.00
  21.00
  22.05
  23.15
  24.31
  25.52
  26.80
  28.14
  29.55
  31.02
  32.57
  34.20
  35.91
  37.71
  39.59
  41.57
PV of cash for distribution, $m
 
  -15
  -16
  -15
  -14
  -13
  -11
  -10
  -9
  -8
  -6
  -5
  -4
  -4
  -3
  -2
  -2
  -1
  -1
  -1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Current shareholders' claim on cash, %
  100
  97.3
  94.6
  92.1
  89.8
  87.6
  85.7
  83.8
  82.1
  80.5
  79.0
  77.5
  76.2
  74.9
  73.7
  72.5
  71.4
  70.3
  69.2
  68.2
  67.2
  66.3
  65.4
  64.5
  63.6
  62.8
  61.9
  61.1
  60.3
  59.6
  58.8

Gladstone Commercial Corporation is a real estate investment trust. The Company focuses on acquiring, owning and managing primarily office and industrial properties. The Company also makes long-term industrial and commercial mortgage loans. As of February 15, 2017, the Company owned 95 properties totaling 10.9 million square feet in 24 states. As of December 31, 2016, the Company's properties were located in various states of the United States, such as Ohio, Pennsylvania, North Carolina, Georgia, South Carolina, Michigan, Minnesota, Colorado and New Jersey. The Company's properties have tenants from various industries, such as telecommunications; healthcare; automobile; electronics; information technology; chemicals, plastics and rubber; containers, packaging and glass; personal and non-durable consumer products; machinery; banking; childcare; buildings and real estate; beverage, food and tobacco; printing and publishing; education; home and office furnishings, and oil and gas.

FINANCIAL RATIOS  of  Gladstone Commercial (GOOD)

Valuation Ratios
P/E Ratio 148.6
Price to Sales 6.9
Price to Book 1.9
Price to Tangible Book
Price to Cash Flow 14.5
Price to Free Cash Flow -19.2
Growth Rates
Sales Growth Rate 2.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -14.3%
Cap. Spend. - 3 Yr. Gr. Rate -11.9%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 163.7%
Total Debt to Equity 163.7%
Interest Coverage 1
Management Effectiveness
Return On Assets 3.5%
Ret/ On Assets - 3 Yr. Avg. 3.5%
Return On Total Capital 0.5%
Ret/ On T. Cap. - 3 Yr. Avg. 0.1%
Return On Equity 1.5%
Return On Equity - 3 Yr. Avg. 0.1%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 89.5%
Gross Margin - 3 Yr. Avg. 89.3%
EBITDA Margin 77.9%
EBITDA Margin - 3 Yr. Avg. 75.9%
Operating Margin 34.9%
Oper. Margin - 3 Yr. Avg. 34.6%
Pre-Tax Margin 4.7%
Pre-Tax Margin - 3 Yr. Avg. 0.4%
Net Profit Margin 4.7%
Net Profit Margin - 3 Yr. Avg. 0.4%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 1050%

GOOD stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the GOOD stock intrinsic value calculation we used $86 million for the last fiscal year's total revenue generated by Gladstone Commercial. The default revenue input number comes from 2016 income statement of Gladstone Commercial. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our GOOD stock valuation model: a) initial revenue growth rate of 9.5% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 10.1%, whose default value for GOOD is calculated based on our internal credit rating of Gladstone Commercial, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Gladstone Commercial.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of GOOD stock the variable cost ratio is equal to 60.5%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for GOOD stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.7% for Gladstone Commercial.

Corporate tax rate of 27% is the nominal tax rate for Gladstone Commercial. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the GOOD stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for GOOD are equal to 912.2%.

Life of production assets of 20.6 years is the average useful life of capital assets used in Gladstone Commercial operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for GOOD is equal to -5.8%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $311 million for Gladstone Commercial - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 27.734 million for Gladstone Commercial is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Gladstone Commercial at the current share price and the inputted number of shares is $0.6 billion.

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COMPANY NEWS

▶ Thoughts on the Gladstone Companies   [Sep-20-17 05:08PM  GuruFocus.com]
▶ Gladstone Commercial reports 2Q results   [Jul-31-17 10:46PM  Associated Press]
▶ Gladstone Commercial reports 1Q results   [May-02-17 06:53PM  Associated Press]
▶ Gladstone Commercial reports 4Q results   [Feb-15-17 06:04PM  Associated Press]
▶ Is Gladstone Commercial Corporation (GOOD) A Good Stock To Buy?   [Dec-12-16 04:09AM  at Insider Monkey]
Financial statements of GOOD
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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