EGP - Americold Realty Trust: Shares Are At Risk Of Overheating

2023-09-20 11:32:28 ET

Summary

• Americold Realty Trust, Inc. stock has surged 17.6% in recent months, outperforming the S&P 500.
• The company's financial performance has been mixed, with revenue declining and operating cash flow plunging.
• Despite optimism about future growth, the stock is considered pricey and there are more appealing investment opportunities available.

Even though many experts believe that the market is efficient, the data I have seen suggests the opposite. My own experiences have also made clear that there are inefficiencies in the market. In the short run, these inefficiencies can cause shares of companies to rocket higher when they don't deserve to or to fall lower when it's unwarranted.

A great example of the former occurring over the past several months involves a real estate investment trust, or REIT, known as Americold Realty Trust, Inc. ( COLD ). As its name suggests, this enterprise focuses on owning temperature-controlled warehousing and also engaging in transportation services that involve that space. This is an interesting line of business that I personally am very fond of. But as an investor, it's important to keep personal biases out of the picture. When looking at the stock and how shares are priced right now, I have to acknowledge that this is a pricey proposition to get involved with. I wouldn't go so far as to downgrade the company just yet. But if shares move much higher from here, I would argue that a bearish rating could very well be warranted.

Shares tell one story, fundamentals another

The last article that I wrote about Americold Realty Trust was published in April of this year. Leading up to that point, shares had been underperforming, even as financial performance generated by the company was mixed but mostly positive. I chalked this underperformance up to how pricey shares were, though I did not hide my belief that the long-term picture for the company would probably be fine, particularly thanks to continued expansion into international markets. Since then, we have seen a complete 180. Shares have generated upside of 17.6% at a time when the S&P 500 (SP500) has jumped only 8.4%. Naturally, this makes me tempted to downgrade the company from the "hold" I had it rated previously to a "sell."

From a fundamental perspective, performance achieved by Americold Realty Trust has been rather mixed. To see what I mean, we should first look at financial performance covering the second quarter of the company's 2023 fiscal year. Revenue for that time came in at $649.6 million. That represents a decline of 11% compared to the $729.8 million in revenue generated one year earlier. This decline came even as the Warehouse segment of the company saw revenue grow by 3% from for $564.4 million to $581.2 million. Interestingly, organic growth would have been higher at 4.1%. However, the company was negatively impacted by foreign currency fluctuations.

The growth in sales achieved by Americold Realty Trust was thanks to pricing initiatives, rate escalations, and improvements in occupancy rates at same store properties. Completed expansion and development projects, as well as an acquisition, helped push revenue up about $2.3 million on a constant currency basis. But most of the growth came from the aforementioned factors.

The pain for the company, then, was driven in part by the Transportation segment. Revenue here plunged from $81.9 million to $58.1 million. That's a drop of 29.1%. However, the decline would have been a more modest 27.7% had it not been for foreign currency fluctuations. Management said that the decline in sales was mostly because of a strategic transition of its transportation operations in the UK to a third-party logistics model. Softening demand for its services was also a component. But the biggest pain for the company came from its Third-Party Managed segment. Here, revenue declined from $83.5 million to $10.4 million. That's an 87.6% decline and it was attributable to management's decision to strategically exit operations of its largest domestic customer in that segment.

A drop in revenue like this is bound to have an impact on the company's bottom line. Operating cash flow, for instance, plunged from $117.6 million to only $41.3 million. If we adjust for changes in working capital, we get a decline from $89.2 million to $70.2 million. Fortunately, other profitability metrics held up better. FFO, or funds from operations, managed to tick down only slightly from $65.4 million to $62.5 million. On an adjusted basis, it actually rose from $73.9 million to $75.6 million. And also on the rise was EBITDA. It increased from $120.2 million to $134.7 million.

It's important to note that the performance seen in the most recent quarter was part of a larger trend. As you can see in the chart above, financial performance for the first half of 2023 in its entirety was worse than what it was the same time last year.

Despite the problems that the company has seen this year, management is focused on continuing to grow the company. In fact, between domestic opportunities and international ones, it has a pipeline of projects worth more than $1 billion. Recently completed expansion and development projects have totaled around $350 million, with those completed in the last 18 months costing $292 million. The firm also has other projects that are under construction that should total around 28.4 million cubic feet of space, all of which should come at a cost of only $28 million. These projects are two expansions and one complete development.

Unfortunately, we don't yet know the four impact that all of these projects will have or when they will be completed. But we do know that management has high expectations for the rest of this year. Adjusted funds from operations, or FFO, per share is forecasted to be between $1.20 and $1.30. At the midpoint, that should give us cash flow of $338.1 million. We don't have any guidance when it comes to other profitability metrics. But based on my own estimates, FFO should come in at around $280.3 million. Adjusted operating cash flow should be roughly $407.3 million, and EBITDA should total approximately $532.1 million.

Using these figures, I was able to easily value the company. As you can see in the chart above, shares are trading at a forward price to adjusted operating cash flow multiple of 21.9. The forward price to FFO multiple is 31.8, while the adjusted figure for this is 26.4. Finally, the EV to EBITDA multiple should be 23.3. As the chart illustrates, the stock does look cheaper on a forward basis than it does using data from 2022. This suggests that cash flows will strengthen for this year as a whole relative to what was seen last year, even though recent financial data has been mixed. Truth be told, shares do look rather pricey on an absolute basis. And as the table below illustrates, the stock is expensive relative to some other players as well. In the REIT space, three of the five companies that I looked at were trading at price to operating cash flow multiples that were lower than what Americold Realty Trust is going for. That number increases to four when we use the EV to EBITDA approach.

Even though the stock is pricey, one thing that the company does have going for it is that its distribution is solid. Using results from 2022, for instance, Americold Realty Trust pays out only 66% of its adjusted operating cash flow toward distributions. This increases to 79.5% when we are talking about the adjusted FFO. This means that management could increase the distribution further. And that would be nice considering that, by REIT standards, the 2.7% yield of the stock is quite low.

Takeaway

Financially speaking, Americold Realty Trust has seen some mixed results as of late. Having said that, management seems optimistic about the near term and I fully believe that the long term picture for the company should be positive. While this is great, shares look very pricey on an absolute basis and are even near the pricey end of the spectrum relative to similar firms. Because of these factors, I would say that there are more appealing prospects to be had right now. Because of the relative valuation of the company, I have decided to keep it rated a "hold" for now. But if shares get any more expensive, a downgrade could be in store.

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