2023-04-11 09:36:11 ET
Summary
- Americold Realty Trust has underperformed the market in recent months, even as financial performance has been mixed but generally positive.
- The problem lies in the price of the stock, which is awfully lofty at this point in time.
- Long term, though, the company should be fine, especially as it grows in international markets.
I've always found myself drawn to companies that are unique in nature. And few companies can be as unique as Americold Realty Trust ( COLD ), a REIT that focuses on owning temperature-controlled warehousing, and that engages in transportation services related to that space. Over the past few months, shares of the company have underperformed the broader market. This comes even as management focuses on expanding internationally. Fortunately, the return disparity between it and the market has not been all that large. That can be chalked up to the high quality of the operations we are dealing with. But this doesn't necessarily mean that investors would be wise to take a stake in the firm. Given how shares are priced at the moment, I do believe that there are better opportunities to be considered at this time.
Shares have cooled
Since I last wrote about Americold Realty Trust in early September of 2022, shares have generated downside for investors of 2.6%. That compares to the 2.8% increase seen from the S&P 500. In that article , I did tell readers that some of the company's bottom line results had come in mixed over the prior few months and that shares were looking a bit pricey. This led me to rate the business a 'hold' to reflect my view of the time that shares should generate upside or downside that would more or less be in line with the broader market. While I do insist that the return disparity between it and the S&P 500 has not been all that great, I would say that it has been large enough to say that my call on the company was a bit off.
To be clear, this return disparity was not driven by weak fundamental performance. By most measures, Americold Realty Trust continues to do quite well. During the final quarter of the 2022 fiscal year , for instance, the business reported revenue of $721.5 million. That's 0.7% higher than the $716.5 million reported one year earlier. From a revenue perspective, the enterprise did suffer from a reduction in volume associated with its third-party-managed operations that, in turn, was attributable to the company's decision to exit some of this business. The growth, meanwhile, was thanks to higher pricing, a rise in occupancy, scheduled rate escalations, and other factors.
Bottom line results for the company also came in strong. Operating cash flow, for instance, grew from $108.8 million to $117.1 million. Even if we adjust for changes in working capital, it would have risen from $84.9 million to $96.2 million. This is not to say that every profitability metric increased year over year. FFO, or funds from operations, remained flat at $70.2 million, while the adjusted FFO figure for the company fell from $82.2 million to $78.2 million. And finally, EBITDA for the business expanded from $114.6 million to $131.8 million. If you look at the chart above, you can also see results for 2022 as a whole. For the most part, these numbers are very similar from a year-over-year perspective to what the company experienced in the final quarter of the year.
Despite sweeping economic uncertainty, management remains optimistic about the 2023 fiscal year. For instance, they believe that same-store Warehouse segment revenue this year, on a constant currency basis, should grow by between 3% and 6%. While this makes up the vast majority of the company's revenue, it's not enough to give us an understanding of exactly what the firm's sales will be. After all, we don't know the impact that acquisitions will have on its top line. On the bottom line, however, management said that adjusted FFO should be between $1.14 per share and $1.24 per share. At the midpoint, and assuming that share count doesn't change, this would translate to a reading of $320.8 million. In the table above, you can see how the other profitability metrics for the company should look if they grow at the same rate, year over year, as adjusted FFO is slated to.
Taking these figures, it's easy to value the company. On a forward basis, the price to FFO multiple stands at 28.5. The price to adjusted FFO multiple is even lower at 23.6, while the price to adjusted operating cash flow multiple should be 19.6. And finally, the EV to EBITDA multiple should be about 21.2. In the chart above, you can also see pricing using data from 2021 and 2022. Each year, the picture looks a bit better. Meanwhile, in the table below, you can see how the stock stacks up against five similar firms. Using the price to FFO approach, four of the five companies ended up being cheaper than our prospect. If you look at it from a price to adjusted FFO scenario, you end up with only one of the five being cheaper. This turns to two of the five on a price to adjusted operating cash flow basis and rises further to three out of the five when it comes to the EV to EBITDA approach.
Company | Price / Adjusted Operating Cash Flow | Price / FFO | Price / Adjusted FFO | EV / EBITDA |
Americold Realty Trust | 21.0 | 30.4 | 25.4 | 22.6 |
EastGroup Properties ( EGP ) | 21.9 | 23.6 | 29.8 | 24.0 |
First Industrial Realty Trust ( FR ) | 16.6 | 22.8 | 30.4 | 18.1 |
STAG Industrial ( STAG ) | 15.0 | 15.0 | 17.7 | 15.9 |
Rexford Industrial Realty ( REXR ) | 30.1 | 29.8 | 35.9 | 32.9 |
Terreno Realty Corporation ( TRNO ) | 33.2 | 46.0 | 31.9 | 20.9 |
Moving beyond 2023, the picture for the company will get rather interesting. For 2023, management plans to use between $100 million and $200 million to work on organically opening new locations. However, management has also been very active over the prior few years when it comes to acquisition activities. In fact, since going public in 2018 and ending at the end of 2022, the business has acquired over 100 facilities, representing approximately 40% of its total warehouse facility network. It shouldn't be a surprise that each facility would bring with it a different system for operating. This can complicate matters rather significantly. That is why, in February of this year, management announced the launch of what it calls Project Orion. This project includes the setup of a new cloud-based ERP (enterprise resource planning) software system in order to further integrate the properties that have been acquired and to essentially streamline many of their activities such as billing, HR management, maintenance, and more. But this won't happen overnight. This is slated to be a 3-year-long project that will cost around $100 million.
This will make future acquisitions more valuable as well. And it is clear from recent activities that future acquisitions are definitely under consideration. As recently as the middle of March of this year, Americold Realty Trust announced a strategic investment in RSA Cold Chain in Dubai. In exchange for $3.9 million, the company is receiving a 49% stake in the business, which operates as a cold storage firm located in Dubai. Only 10 days later, management announced that they were opening a facility expansion in Spain that added 11 loading bays and 12,000 pallet positions to the property. That more than doubled that facility's size to roughly 20,000 pallet positions that are used for frozen, chilled, and ambient products.
If international expansion seems odd for a company that has largely been focused on the North American market, it's because it is somewhat new for the business. Using data from the end of the 2022 fiscal year, an impressive 86.6% of all square footage owned by Americold Realty Trust what is located throughout North America. There is no doubt that the REIT will continue to focus on growth here at home. But with a 17.7% market share throughout the continent, growth won't be easy. After all, the 10 largest players throughout North America, combined, boast a 57.6% market share, with Lineage Logistics serving as the only player that's larger than it with a 27.7% market share. That's why the company has 27 locations spread throughout Europe, 18 in the Asia Pacific region, and another 2 in South America, with one of them being Brazil and the other being Argentina. There does seem to be plenty of opportunity overseas. Globally, Americold Realty Trust still is the second largest player with a 5.7% market share. But the top ten largest players, combined, control only 21.5% of that market.
Takeaway
Right now, Americold Realty Trust strikes me as a company that is likely to be here for the long haul. The firm is stable and I have no doubt that it will create additional value for its investors down the road. For those who don't mind waiting for a return, I could definitely understand the desire to purchase shares in the enterprise. This is especially true when you consider the investments that management has made and the investments it looks set to make in the years to come. But as a value investor, I place a great deal of stock on affordable companies. And shares are not yet cheap enough in my book to warrant anything more bullish than a 'hold' at this time.
For further details see:
Americold Realty Trust: Still Not Cool Enough To Pull The Trigger On