Stock Analysis
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- NasdaqGS:PECO
Phillips Edison & Company, Inc. (NASDAQ:PECO) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?
It is hard to get excited after looking at Phillips Edison's (NASDAQ:PECO) recent performance, when its stock has declined 8.4% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Phillips Edison's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Phillips Edison
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Phillips Edison is:
2.1% = US$55m ÷ US$2.6b (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.02 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Phillips Edison's Earnings Growth And 2.1% ROE
As you can see, Phillips Edison's ROE looks pretty weak. Not just that, even compared to the industry average of 6.8%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Phillips Edison grew its net income at a significant rate of 48% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Phillips Edison's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 13%.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for PECO? You can find out in our latest intrinsic value infographic research report.
Is Phillips Edison Using Its Retained Earnings Effectively?
Phillips Edison's three-year median payout ratio is a pretty moderate 48%, meaning the company retains 52% of its income. By the looks of it, the dividend is well covered and Phillips Edison is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Along with seeing a growth in earnings, Phillips Edison only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.
Conclusion
In total, it does look like Phillips Edison has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
What are the risks and opportunities for Phillips Edison?
Phillips Edison & Company, Inc. (“PECO”), an internally-managed REIT, is one of the nation’s largest owners and operators of grocery-anchored shopping centers.
Rewards
Trading at 2.6% below our estimate of its fair value
Earnings are forecast to grow 11.84% per year
Earnings grew by 219.6% over the past year
Risks
Interest payments are not well covered by earnings
Shareholders have been diluted in the past year
Further research on
Phillips Edison
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About NasdaqGS:PECO
Phillips Edison
Phillips Edison & Company, Inc. (“PECO”), an internally-managed REIT, is one of the nation’s largest owners and operators of grocery-anchored shopping centers.
Solid track record second-rate dividend payer.
