Intrinsic value of PS Business Parks - PSB

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$121.06

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$121.06

 
Intrinsic value

$14.74

 
Up/down potential

-88%

 
Rating

str. sell

 
Value-price divergence* premium content

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

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

We calculate the intrinsic value of PSB 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 3.3

 

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, %
  3.48
  3.20
  3.38
  3.54
  3.69
  3.82
  3.94
  4.04
  4.14
  4.23
  4.30
  4.37
  4.44
  4.49
  4.54
  4.59
  4.63
  4.67
  4.70
  4.73
  4.76
  4.78
  4.80
  4.82
  4.84
  4.86
  4.87
  4.88
  4.90
  4.91
  4.92
Revenue, $m
  387
  399
  413
  428
  443
  460
  478
  498
  518
  540
  563
  588
  614
  642
  671
  702
  734
  768
  804
  843
  883
  925
  969
  1,016
  1,065
  1,117
  1,171
  1,228
  1,289
  1,352
  1,418
Variable operating expenses, $m
 
  256
  265
  274
  284
  295
  307
  319
  332
  346
  361
  377
  394
  411
  430
  450
  471
  493
  516
  540
  566
  593
  621
  651
  683
  716
  751
  787
  826
  867
  909
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
  237
  256
  265
  274
  284
  295
  307
  319
  332
  346
  361
  377
  394
  411
  430
  450
  471
  493
  516
  540
  566
  593
  621
  651
  683
  716
  751
  787
  826
  867
  909
Operating income, $m
  150
  143
  148
  153
  159
  165
  172
  179
  186
  194
  202
  211
  220
  230
  241
  252
  264
  276
  289
  302
  317
  332
  348
  365
  382
  401
  420
  441
  463
  485
  509
EBITDA, $m
  249
  246
  254
  263
  273
  283
  294
  306
  319
  332
  346
  362
  378
  395
  412
  431
  451
  472
  495
  518
  543
  569
  596
  625
  655
  687
  720
  755
  792
  831
  872
Interest expense (income), $m
  7
  8
  9
  9
  10
  11
  11
  12
  13
  14
  15
  16
  17
  18
  20
  21
  22
  24
  26
  27
  29
  31
  33
  35
  37
  39
  42
  44
  47
  49
  52
Earnings before tax, $m
  145
  135
  140
  144
  149
  155
  160
  166
  173
  180
  187
  195
  203
  212
  221
  231
  241
  252
  263
  275
  288
  301
  315
  330
  345
  362
  379
  397
  416
  436
  457
Tax expense, $m
  0
  37
  38
  39
  40
  42
  43
  45
  47
  49
  51
  53
  55
  57
  60
  62
  65
  68
  71
  74
  78
  81
  85
  89
  93
  98
  102
  107
  112
  118
  123
Net income, $m
  128
  99
  102
  105
  109
  113
  117
  121
  126
  131
  137
  142
  148
  155
  161
  168
  176
  184
  192
  201
  210
  220
  230
  241
  252
  264
  277
  290
  304
  318
  334

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  129
  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
  2,119
  2,059
  2,128
  2,204
  2,285
  2,372
  2,466
  2,565
  2,671
  2,784
  2,904
  3,031
  3,166
  3,308
  3,458
  3,617
  3,784
  3,961
  4,147
  4,343
  4,549
  4,767
  4,996
  5,237
  5,490
  5,757
  6,037
  6,332
  6,642
  6,968
  7,311
Adjusted assets (=assets-cash), $m
  1,990
  2,059
  2,128
  2,204
  2,285
  2,372
  2,466
  2,565
  2,671
  2,784
  2,904
  3,031
  3,166
  3,308
  3,458
  3,617
  3,784
  3,961
  4,147
  4,343
  4,549
  4,767
  4,996
  5,237
  5,490
  5,757
  6,037
  6,332
  6,642
  6,968
  7,311
Revenue / Adjusted assets
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
  0.194
Average production assets, $m
  1,891
  1,951
  2,017
  2,089
  2,166
  2,249
  2,337
  2,432
  2,532
  2,639
  2,753
  2,873
  3,001
  3,135
  3,278
  3,428
  3,587
  3,754
  3,931
  4,117
  4,312
  4,519
  4,736
  4,964
  5,204
  5,457
  5,723
  6,002
  6,296
  6,605
  6,930
Working capital, $m
  0
  -133
  -137
  -142
  -148
  -153
  -159
  -166
  -173
  -180
  -188
  -196
  -204
  -214
  -223
  -234
  -244
  -256
  -268
  -281
  -294
  -308
  -323
  -338
  -355
  -372
  -390
  -409
  -429
  -450
  -472
Total debt, $m
  230
  247
  265
  284
  304
  327
  350
  376
  403
  431
  462
  494
  528
  564
  602
  643
  685
  730
  777
  827
  880
  935
  993
  1,054
  1,119
  1,186
  1,258
  1,332
  1,411
  1,494
  1,581
Total liabilities, $m
  506
  523
  541
  560
  580
  603
  626
  652
  679
  707
  738
  770
  804
  840
  878
  919
  961
  1,006
  1,053
  1,103
  1,156
  1,211
  1,269
  1,330
  1,395
  1,462
  1,534
  1,608
  1,687
  1,770
  1,857
Total equity, $m
  1,613
  1,536
  1,588
  1,644
  1,705
  1,770
  1,839
  1,914
  1,993
  2,077
  2,166
  2,261
  2,361
  2,468
  2,580
  2,698
  2,823
  2,955
  3,093
  3,240
  3,394
  3,556
  3,727
  3,907
  4,096
  4,295
  4,504
  4,724
  4,955
  5,198
  5,454
Total liabilities and equity, $m
  2,119
  2,059
  2,129
  2,204
  2,285
  2,373
  2,465
  2,566
  2,672
  2,784
  2,904
  3,031
  3,165
  3,308
  3,458
  3,617
  3,784
  3,961
  4,146
  4,343
  4,550
  4,767
  4,996
  5,237
  5,491
  5,757
  6,038
  6,332
  6,642
  6,968
  7,311
Debt-to-equity ratio
  0.143
  0.160
  0.170
  0.170
  0.180
  0.180
  0.190
  0.200
  0.200
  0.210
  0.210
  0.220
  0.220
  0.230
  0.230
  0.240
  0.240
  0.250
  0.250
  0.260
  0.260
  0.260
  0.270
  0.270
  0.270
  0.280
  0.280
  0.280
  0.280
  0.290
  0.290
Adjusted equity ratio
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746
  0.746

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  128
  99
  102
  105
  109
  113
  117
  121
  126
  131
  137
  142
  148
  155
  161
  168
  176
  184
  192
  201
  210
  220
  230
  241
  252
  264
  277
  290
  304
  318
  334
Depreciation, amort., depletion, $m
  99
  102
  106
  109
  113
  118
  122
  127
  133
  138
  144
  150
  157
  164
  172
  179
  188
  197
  206
  216
  226
  237
  248
  260
  272
  286
  300
  314
  330
  346
  363
Funds from operations, $m
  248
  201
  208
  215
  222
  231
  239
  249
  259
  269
  281
  293
  305
  319
  333
  348
  364
  380
  398
  416
  436
  456
  478
  501
  525
  550
  576
  604
  633
  664
  696
Change in working capital, $m
  -3
  -4
  -4
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -20
  -21
  -22
Cash from operations, $m
  251
  170
  212
  220
  228
  236
  245
  255
  266
  277
  288
  301
  314
  328
  343
  358
  375
  392
  410
  429
  449
  471
  493
  516
  541
  567
  594
  623
  653
  685
  718
Maintenance CAPEX, $m
  0
  -99
  -102
  -106
  -109
  -113
  -118
  -122
  -127
  -133
  -138
  -144
  -150
  -157
  -164
  -172
  -179
  -188
  -197
  -206
  -216
  -226
  -237
  -248
  -260
  -272
  -286
  -300
  -314
  -330
  -346
New CAPEX, $m
  -45
  -60
  -66
  -71
  -77
  -83
  -89
  -94
  -101
  -107
  -114
  -120
  -127
  -135
  -142
  -150
  -159
  -167
  -176
  -186
  -196
  -206
  -217
  -228
  -240
  -253
  -266
  -279
  -294
  -309
  -325
Cash from investing activities, $m
  -85
  -159
  -168
  -177
  -186
  -196
  -207
  -216
  -228
  -240
  -252
  -264
  -277
  -292
  -306
  -322
  -338
  -355
  -373
  -392
  -412
  -432
  -454
  -476
  -500
  -525
  -552
  -579
  -608
  -639
  -671
Free cash flow, $m
  166
  11
  44
  42
  41
  40
  39
  38
  38
  37
  37
  36
  36
  36
  36
  36
  36
  37
  37
  37
  38
  39
  39
  40
  41
  42
  43
  44
  45
  47
  48
Issuance/(repayment) of debt, $m
  -250
  17
  18
  19
  21
  22
  24
  25
  27
  29
  30
  32
  34
  36
  38
  40
  43
  45
  47
  50
  52
  55
  58
  61
  64
  68
  71
  75
  79
  83
  87
Issuance/(repurchase) of shares, $m
  187
  0
  0
  0
  0
  3
  7
  11
  15
  18
  22
  26
  30
  34
  38
  42
  46
  50
  55
  59
  64
  68
  73
  79
  84
  89
  95
  101
  107
  114
  121
Cash from financing (excl. dividends), $m  
  -87
  17
  18
  19
  21
  25
  31
  36
  42
  47
  52
  58
  64
  70
  76
  82
  89
  95
  102
  109
  116
  123
  131
  140
  148
  157
  166
  176
  186
  197
  208
Total cash flow (excl. dividends), $m
  79
  28
  62
  62
  62
  62
  63
  64
  65
  66
  67
  69
  70
  72
  74
  77
  79
  82
  84
  87
  90
  94
  97
  101
  105
  110
  114
  119
  124
  129
  135
Retained Cash Flow (-), $m
  48
  -52
  -52
  -56
  -61
  -65
  -70
  -74
  -79
  -84
  -89
  -95
  -100
  -106
  -112
  -118
  -125
  -132
  -139
  -146
  -154
  -162
  -171
  -180
  -189
  -199
  -209
  -220
  -231
  -243
  -256
Prev. year cash balance distribution, $m
 
  129
  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
 
  105
  10
  5
  1
  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
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  100
  9
  5
  1
  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
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  99.9
  99.7
  99.5
  99.1
  98.6
  98.1
  97.6
  96.9
  96.3
  95.6
  94.8
  94.0
  93.2
  92.4
  91.5
  90.7
  89.8
  88.9
  88.0
  87.1
  86.2
  85.2
  84.3
  83.4
  82.5
  81.6

PS Business Parks, Inc., a real estate investment trust (REIT), together with its subsidiaries, engages in the acquisition, development, ownership, and operation of commercial properties primarily multi-tenant flex, office, and industrial space. As of December 31, 2007, the company owned and operated approximately 19.6 million rentable square feet of commercial space located in Arizona, California, Florida, Maryland, Oregon, Texas, Virginia, and Washington, as well as managed approximately 1.4 million rentable square feet. It also owned approximately 6.4 acres of land in Northern Virginia; 14.9 acres in Portland, Oregon; and 10.0 acres in Dallas, Texas for the development of commercial properties. PS Business Parks has elected to be taxed as a REIT under the Internal Revenue Code and would not be subject to federal income tax to the extent it distributes at least 90% of its REIT taxable income to its shareholders. The company was founded in 1983. It was formerly known as Public Storage Properties XI, Inc. and changed its name to PS Business Parks, Inc. in 1998. The company is based in Glendale, California.

FINANCIAL RATIOS  of  PS Business Parks (PSB)

Valuation Ratios
P/E Ratio 25.7
Price to Sales 8.5
Price to Book 2
Price to Tangible Book
Price to Cash Flow 13.1
Price to Free Cash Flow 15.9
Growth Rates
Sales Growth Rate 3.5%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -2.2%
Cap. Spend. - 3 Yr. Gr. Rate -23.6%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 14.3%
Total Debt to Equity 14.3%
Interest Coverage 22
Management Effectiveness
Return On Assets 6.3%
Ret/ On Assets - 3 Yr. Avg. 7.1%
Return On Total Capital 6.8%
Ret/ On T. Cap. - 3 Yr. Avg. 7.5%
Return On Equity 7.8%
Return On Equity - 3 Yr. Avg. 8.6%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 68.2%
Gross Margin - 3 Yr. Avg. 67.3%
EBITDA Margin 64.9%
EBITDA Margin - 3 Yr. Avg. 74.6%
Operating Margin 38.8%
Oper. Margin - 3 Yr. Avg. 36%
Pre-Tax Margin 37.5%
Pre-Tax Margin - 3 Yr. Avg. 43.9%
Net Profit Margin 33.1%
Net Profit Margin - 3 Yr. Avg. 38%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 108.6%

PSB stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the PSB stock intrinsic value calculation we used $387 million for the last fiscal year's total revenue generated by PS Business Parks. The default revenue input number comes from 2016 income statement of PS Business Parks. 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 PSB stock valuation model: a) initial revenue growth rate of 3.2% 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 4.3%, whose default value for PSB is calculated based on our internal credit rating of PS Business Parks, 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 PS Business Parks.
    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 PSB stock the variable cost ratio is equal to 64.1%.

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 PSB 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 3.5% for PS Business Parks.

Corporate tax rate of 27% is the nominal tax rate for PS Business Parks. 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 PSB 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 PSB are equal to 488.6%.

Life of production assets of 19.1 years is the average useful life of capital assets used in PS Business Parks 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 PSB is equal to -33.3%. 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 - $1613 million for PS Business Parks - 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 27.361 million for PS Business Parks 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 PS Business Parks at the current share price and the inputted number of shares is $3.3 billion.


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COMPANY NEWS

▶ PS Business Parks reports 4Q results   [Feb-21-17 05:56PM  Associated Press]
▶ 4 REITs To Help You Sleep Well At Night   [Feb-20-17 07:00AM  at Forbes]
▶ Is ITT Inc. (ITT) Going to Burn These Hedge Funds?   [Dec-02-16 04:46PM  at Insider Monkey]
▶ Should You Avoid American Eagle Outfitters (AEO)?   [Dec-01-16 08:17AM  at Insider Monkey]
▶ Avoid Sucker Yields, Buy REITs With Growing Dividends   [Apr-16-16 07:00AM  at Forbes]
Stock chart of PSB Financial statements of PSB
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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