Stock Analysis

Alexandria Real Estate Equities, Inc.'s (NYSE:ARE) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

NYSE:ARE
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Alexandria Real Estate Equities (NYSE:ARE) has had a great run on the share market with its stock up by a significant 14% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Alexandria Real Estate Equities' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Alexandria Real Estate Equities

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Alexandria Real Estate Equities is:

5.6% = US$822m ÷ US$15b (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.06 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Alexandria Real Estate Equities' Earnings Growth And 5.6% ROE

When you first look at it, Alexandria Real Estate Equities' ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 5.1%, we may spare it some thought. Particularly, the exceptional 50% net income growth seen by Alexandria Real Estate Equities over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Alexandria Real Estate Equities' 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 10.0%.

past-earnings-growth
NYSE:ARE Past Earnings Growth June 2nd 2021

Earnings growth is a huge factor in stock valuation. 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. What is ARE worth today? The intrinsic value infographic in our free research report helps visualize whether ARE is currently mispriced by the market.

Is Alexandria Real Estate Equities Making Efficient Use Of Its Profits?

Alexandria Real Estate Equities has a very high three-year median payout ratio of 51%. This means that it has only 49% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Regardless, this hasn't hampered its ability to grow as we saw earlier.

Besides, Alexandria Real Estate Equities has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 55%. However, Alexandria Real Estate Equities' future ROE is expected to decline to 2.6% despite there being not much change anticipated in the company's payout ratio.

Summary

Overall, we feel that Alexandria Real Estate Equities certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. 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.

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This article by Simply Wall St is general in nature. 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.
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