Is There an Opportunity in Equity Residential After Shares Rise 4.8% This Month?
Wondering if Equity Residential is a hidden bargain or just another real estate stock? Let’s take a closer look at what the market and the numbers are actually saying.
The stock has seen a recent uptick, rising 2.0% over the last week and 4.8% over the past month, though it is still down 11.9% year-to-date and 16.2% over the past year.
Many investors are watching closely as news emerges about shifting rental demand in major urban centers and changing interest rate expectations. Both factors tend to drive sentiment in the real estate sector. Headlines highlighting increases in housing starts and evolving tenant preferences have added extra context to Equity Residential’s recent share price movements.
When you break down the numbers, Equity Residential scores a pretty compelling 5 out of 6 on our valuation check. Let’s explore the usual approaches to valuation, but keep in mind there is an even better way we’ll get to at the end.
The Discounted Cash Flow (DCF) model is a common approach for valuing real estate investment trusts like Equity Residential. It works by projecting future cash flows, specifically adjusted funds from operations, then discounting them back to their present value using an appropriate rate. This process aims to estimate what the business is truly worth today, based on the cash it can generate over time.
For Equity Residential, the current Free Cash Flow stands at $1.47 billion. Analysts have provided estimates for the next five years, with additional long-term projections showing steady growth. By 2028, Free Cash Flow is anticipated to reach $1.48 billion, and the ten-year outlook points to further gradual increases, all calculated in US dollars. The underlying valuation model used here is a two-stage approach that combines analyst inputs and responsible extrapolation for years further out.
Based on these calculations, the DCF approach suggests an intrinsic fair value of $90.63 per share. With the DCF model indicating that the stock is trading at a 31.9% discount to this intrinsic value, Equity Residential currently appears to be undervalued compared to what its future cash flows suggest it should be worth.
For profitable companies like Equity Residential, the Price-to-Earnings (PE) ratio is a widely used valuation metric because it directly relates a company’s share price to its annual earnings. PE ratios help investors gauge what the market is willing to pay for each dollar of current earnings, setting a standard for evaluating whether a stock appears cheap or expensive compared to earnings.
It is important to remember that what counts as a “normal” or “fair” PE ratio can vary depending on factors such as growth prospects and perceived business risks. Companies with higher expected growth or lower risk typically have higher PE multiples, while slower-growing or riskier companies tend to trade at lower ratios.
Currently, Equity Residential trades at a PE ratio of 20.3x. This is just above the Residential REITs industry average of 20.1x, but well below the peer group average of 38.3x. To bring a more individualized perspective, Simply Wall St’s “Fair Ratio” for Equity Residential is 23.4x, which considers the company’s growth expectations, margins, market capitalization, and industry risk profile. Unlike a simple peer or sector comparison, the Fair Ratio provides a measure of what the multiple might be in light of the company’s unique qualities and risks.
Comparing Equity Residential’s actual PE ratio of 20.3x to its Fair Ratio of 23.4x indicates the stock is trading at a noticeable discount to what would be expected based on its fundamentals.
Earlier we mentioned that there is an even better way to understand valuation. Let’s introduce you to Narratives. A Narrative lets you connect your perspective about a company—your story behind the numbers—to a financial forecast, creating your own view of its fair value in just a few clicks. Narratives are an easy-to-use tool, available on the Simply Wall St Community page, and are used by millions of investors to bring context and conviction to their buy or sell decisions.
By linking a company’s unique story, your estimated future revenue, earnings, or margins, and a fair value calculation, Narratives help you clearly see whether the stock looks attractive (Fair Value higher than Price) or not. They update automatically when fresh news or earnings are released.
For Equity Residential, different investors might build very different Narratives. Someone bullish on urban rental demand might see a fair value as high as $81.00 per share, while a more cautious view focused on regulatory or affordability risks could yield a fair value as low as $66.00.
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.
