Grocery Centers And Acquisitions Will Secure Future Resilience

Key Takeaways

• Focus on grocery-anchored centers ensures resilient revenue growth during economic uncertainty due to strong demand for necessity-based goods.
  
• Strategic acquisitions and disciplined financial management are set to bolster earnings and drive long-term growth with high occupancy and flexible liquidity.
  
• Economic uncertainty, rising interest rates, and potential tenant challenges could jeopardize Phillips Edison's financial stability and revenue predictability.

Catalysts

Phillips Edison & Company, Inc. (“PECO”) is one of the nation’s largest owners and operators of high-quality, grocery-anchored neighborhood shopping centers.

• Phillips Edison & Company's focus on grocery-anchored centers, with 71% of ABR derived from necessity-based goods, positions it to drive resilient revenue growth even during economic uncertainty.
  
• The company expects to benefit from strong retailer demand and higher rental spreads, projected to sustain high occupancy levels and enhance net margins.
  
• PECO's active acquisition pipeline, targeting $350 million to $450 million in gross acquisitions, aims to bolster earnings through strategic asset growth.
  
• Their disciplined approach to acquisitions with an unlevered IRR target of 9% suggests potential for robust earnings growth by acquiring high-quality centers at attractive returns.
  
• PECO's low leverage and substantial liquidity provide flexibility to pursue growth opportunities, potentially driving long-term core FFO growth and maintaining strong financial health.

Phillips Edison Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Phillips Edison's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 13.6% in 3 years time.
• Analysts expect earnings to reach $109.7 million (and earnings per share of $0.83) by about April 2028, up from $71.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 66.1x on those 2028 earnings, up from 61.4x today. This future PE is greater than the current PE for the US Retail REITs industry at 31.6x.
• Analysts expect the number of shares outstanding to grow by 2.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Phillips Edison Future Earnings Per Share Growth

Risks

• The impact of tariffs is uncertain and could affect some of Phillips Edison’s tenants, leading to potential revenue challenges.
  
• The economic environment is volatile, and any significant downturn could impact consumer spending and reduce rental revenues, particularly impacting businesses in more discretionary spending categories.
  
• Rising interest rates and the expiration of interest rate swaps may lead to increased financing costs, negatively affecting net margins and profitability.
  
• The presence of one-time items like lease termination fees in financial results indicates potential fluctuations in earnings consistency, making future earnings projections less predictable.
  
• While occupancy remains high, any increase in tenant bankruptcies or vacancy could strain rental income, impacting overall revenue stability.

Valuation

• The analysts have a consensus price target of $39.7 for Phillips Edison based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $44.0, and the most bearish reporting a price target of just $36.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $807.5 million, earnings will come to $109.7 million, and it would be trading on a PE ratio of 66.1x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $34.95, the analyst price target of $39.7 is 12.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.