There’s no stopping the Education Realty Trust Inc (NYSE:EDR) growth train, with analysts forecasting high top-line growth in the near future. Over the past three months, the share price has been relatively stable, hovering at US$32.55 the time of publishing. EDR has been on my radar for the past couple of months as I came across another article on the company’s CEO, Mr. Randall Churchey. Today I will touched on some key aspects you should know on a high level, around its financials and growth prospects going forward.
Firstly, a quick intro on the company – One of America’s largest owners, developers and managers of collegiate housing, EdR (NYSE:EDR) is a self-administered and self-managed real estate investment trust that owns or manages 85 communities with more than 45,500 beds serving 53 universities in 26 states. Founded in 1964, it currently operates in United States at a market cap of US$2.48B.
There’s no doubt EDR is delivery on its promises, with a soaring annual revenue growth of 14.68% . Over the past five years, sales has increased by 17.03%, parallel with larger capital expenditure, which most recently reached US$1.74M.
EDR’s financial status is a key element to determine whether or not it is a risky investment – a key aspect most investors overlook when they focus too much on growth. Two major red flags for EDR are its high level of debt at 0.49x equity, and its low level of cash generated from its core operating activities, covering a mere 16.21% of debt. Although EBIT is able to amply cover interest payment, cash management is still not optimal and could still be improved. Or the very least, reduce debt to a more prudent level if cash generated from operating activities is insufficient to cushion for potential future headwinds. The current state of EDR’s financial health lowers my conviction around the sustainability of the business going forward. EDR has poor liquidity management. Firstly, its cash and other liquid assets are not sufficient to meet its upcoming liabilities within the year, let alone its longer term liabilities. Secondly, more than a fifth of its total assets are physical and illiquid, such as inventory. Keeping in mind the downside risk, if we think about the worst case scenario, such as a downturn or bankruptcy, a non-trivial portion of its assets will be hard to liquidate and redistribute back to investors.
EDR is now trading at US$32.55 per share. At 76.07 million shares, that’s a US$2.48B market cap – which is low for a firm with a 5-year free cash flow cumulative average growth (CAGR) trajectory of 17.03% (source: analyst consensus). With an upcoming 2018 free cash flow figure of US$131.03M, the target price for EDR is US$43.69. Therefore, the stock is trading at a 25.51% discount. But, comparing EDR’s current share price to its peers based on its industry and earnings level, it’s overvalued by 161.40%, with a PE ratio of 53.97x vs. the industry average of 20.65x.
If you’re thinking about buying EDR, you have to believe in its growth story, and the possibility that it has not yet been factored into its share price. However, my main reservation with the company is its financial health. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.