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Finance

Is Agree Realty Over or Undervalued?

Shares of retail REIT Agree Realty Corporation (ADC) have risen 6.4% over the past three months owing to widespread anticipation of a speedy macroeconomic recovery. The United States Treasury began delivering $1,400 direct support checks to large swaths of the U.S. populace last week, which is expected to soup-up consumer spending. Analysts expect ADC to gain 19% in the near term to hit $76.81 soon, driven by the rising consumer spending.

However, retail sales in February (apart from automobiles, gasoline and building materials) declined 3.5%, due primarily to harsh weather conditions. While this might seem like a temporary setback, people have become accustomed to virtual lifestyles, which could curb growth in physical retail shopping.

E-commerce sales rose 44% year-over-year to $861.12 billion, accounting for 21.3% of total retail sales in 2020. This trend is likely to continue in 2021, given the widespread adoption of remote lifestyles and the comforts of remote shopping.

Because physical stores remain under pressure, with e-commerce platforms continue to gain traction, ADC’s financials are not expected to improve significantly in the long-term, making its current valuation unsustainable.

Click here to checkout our Retail Industry Report for 2021

Here’s what we think could influence ADC’s performance in the near term:

Weak Profitability

ADC’s forward AFFO payout ratio of 73.97% is 4.6% lower than the industry average  77.55%. Its trailing-12-month asset turnover ratio of 0.08% is 34.9% lower than the industry average  0.12%.

The company’s trailing-12-month FAD payout ratio of 68.81% is 3.3% lower than the industry average  71.17%. And ADC’s trailing-12-month FFO-to-gross-margin ratio of 65.93% is slightly lower than the industry average  66.89%.

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Low Dividend Yield

ADC’s trailing-12-month AFFO yield of 4.7% is nearly 10% lower than the industry average 5.2%. The company’s forward dividend yield of 3.65% is 4% lower than the industry average 3.8%. Furthermore, , its four-year-average dividend yield of 3.8% is 16.8% lower than the industry average  4.6%.

ADC’s forward FFO yield of 5.49% is 14.3% lower than the industry average 6.4%.

Premium Valuation

In terms of non-GAAP trailing-12-month ev/ebitda, ADC is currently trading at 26.46x, 19.9% more expensive than the industry average 22.08x. The company’s trailing-12-month price/sales and price/cash flow multiples of 14.21 and 30.21, respectively, are significantly higher than the respective industry averages.

ADC’s trailing-12-month price/rental revenue of 17.39x is 125.4% higher than the industry average  7.72x.

Negative Earnings Estimates

Analysts expect ADC’s EPS to decline 8.7% year-over-year to $0.42 in the current quarter, ending March 2021. Its EPS is expected to decline 8.5% in the fiscal second quarter ending June 2021, and at a marginal rate per annum over the next five years.

Unfavorable POWR Ratings

ADC has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

ADC has a D grade for Value and Sentiment, and C for Quality. These grades are justified, given the sky-high valuation of the stock despite its low profitability and earnings growth potential.

ADC is ranked #40 of 45 stocks in the D-rated Real Estate Services industry. In addition to the grades I’ve highlighted, you can check out additional ADC ratings for Stability, Momentum and Growth here.

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There are four stocks in the Real Estate Services industry with an overall rating of B. Click here to view them.

Bottom Line

While the low-interest-rate environment paves the way for ADC to undertake capital and asset expansion projects, the market demand for them is likely to remain depressed. With e-commerce companies offering aggressive discounts and home-delivery benefits, the demand for physical retail stores is expected to remain subdued. Given this backdrop, we think ADC stock is best avoided now.

Click here to checkout our Retail Industry Report for 2021

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ADC shares were trading at $67.40 per share on Friday afternoon, down $0.73 (-1.07%). Year-to-date, ADC has gained 1.88%, versus a 4.63% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More…

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