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Equity Office Prop
6/25/2002
LT Buy at $30.18. Price
target: $33.00
By Chris Stallman
| E-mail
When it
comes to real estate, there's one stock towering above its competition...literally.
Equity Office Properties, based out of the windy city, is the nation's
largest REIT with interest in over
750 office buildings throughout the country. That's 120 million
square feet of office space. To give you an idea of how big that
is, it's the equivalent square footage of 2083 football fields.
The company
has been headed by Sam Zell, considered by many to be the greatest
real estate businessmen ever. His specialty lies in buying distressed
properties and turning them into profitable investments.
As many of you probably know, REIT's have been
good investments over the last three years, especially because Warren
Buffett has had his eye on them. But a number of office space REIT's
have been hurt by a rising vacancy rate in their properties. As
more companies are going out of business, it's meaning that
fewer offices are being rented out. But despite this, they have
had strong earnings and expects to earn $3.20/share this year.
What I Like About This Stock
- Not
volatile - The company has a beta of 0.3 and has been seen by
many to be a "safe haven".
- Solid
dividend provides nice income - For those who see income as one
of their major investment objectives, this stock offers a 6.6%
dividend yield ($2.00/share). This helps boost the rate of return
in an up market and cushions it in a down market.
- Respectable
growth rate - The company has grown their top and bottom lines
pretty well. In 1997, they had just over $400 million in sales.
Today they have $3 billion in sales.
- It's
cheap - The company is expected to earn $3.20/share this year
which puts its earnings at about 9.4x FY2002 earnings.
What I Don't Like
- ROE
and ROA aren't spectacular - As with most REIT's, Equity
Office has low investment returns. Their ROE is 6.8% and their
ROA is 2.4%. Far from spectacular...
- Net
profit margin is decreasing - With more vacancies, the company's
net profit margin has fallen from 21.2% to 19.2% in the
last couple of years. However, a turnaround in the market might
bring this number up again.
Overall, I think this is a fairly safe investment with
some nice income and moderate growth possibilities. The stock has
consistently traded in a range of around 27-33/share and I don't
see it breaking out for a while. But I believe that it will reach
$33/share within the next 12 months. That would give you a healthy
15.9% one-year return (with dividend factored in).
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