As earnings season kicks off, a different set of stocks goes under the scrutinizing spotlight of financial markets' judgment. In today's market, there are clear signs of favoritism and preference as investors begin to identify what money "likes" in the economy.
The bank stocks always drive most of this interest toward them, as they are the most direct gauge of what is happening in the underlying economy. However, other spaces can be just as crucial to gaining a feel of what is going on. Warehouse and logistics can show investors just how much consumption and demand activity there is out there, and luckily for them, Prologis (NYSE: PLD) reports earnings on just that.
The stock is reacting initially negatively toward the second quarter of 2023 results. Note that while the stock is down by as much as 3.6% during Tuesday's trading session, it is part of a sector-wide decline for the day. First Industrial Realty Trust (NYSE: FR) and EastGroup Properties (NYSE: EGP) also suffered 2.4% and 2% declines, respectively.
Investors can determine where the keys to the next breakout rally will come from by looking at the company's earnings results. Markets already rewarded the stock with a hopeful future, and analysts follow closely behind.
Market Perception
To get a bit of perspective on why Prologis may be in for a cyclical rally soon, investors need to understand where the industrial stocks have been moving. The Industrial Select Sector SPDR Fund (NYSEARCA: XLI) has outperformed the broader market by 7.7% during the past twelve months.
The only sector that has outperformed the industrials is technology, aided mainly by the stratospheric rallies in names like NVIDIA (NASDAQ: NVDA). Prologis is outside the value chain valued by XLI. However, benefits within these holdings will trickle down into Prologis' turf.
Inside the real estate investment trust (REIT) world, Prologis is the perceived winner, as judged by the valuation multiples that markets reward. As the only REIT deemed a near mega-cap (more significant than $100 billion), Prologis stands alone in taking significant market share away from relatively close peers in the sector. Not only does size matter, but perceived valuations also suggest that Prologis will be the sure winner in the coming months.
By looking at the forward price-to-earnings ratio, which looks to value the next 12 months' earnings rather than the past 12 months, investors can begin to understand market sentiment.
Life Storage (NYSE: LSI) is the only other logistics REIT with a reasonable market cap. Life Storage trades at a forward P/E of 28.4x, significantly below Prologis' 45.1x, implying that markets perceive a brighter future for the stock relative to peers. The willingness to pay a premium for each dollar of future earnings may come from today's earnings results, where Prologis grew earnings per share by 59.7% over the past year.
Financials Behind the Wheel
Prologis' revenue grew by an astonishing 95.8% thanks to the normalization of global supply chains.
As the severe disruptions suffered in logistics networks of all kinds put a dent in the economy, the improving health in these chains may have aided activity and rental rates for Prologis' portfolio. These trends have gained so much momentum during the past year that management needed to revise their 2023 full-year guidance higher.
EPS expectations for full-year 2023 are now revised 5.5% higher, pointing toward a $3.30 to $3.40 range. This is important for investors considering that Prologis carries the highest forward P/E in its close peer set. Maybe broader markets expect these ranges to be more of an understatement, readying themselves for a surprise increase by bidding up the valuations.
Prologis analyst ratings land on the same page as management and markets, as they have provided a consensus price target of $143.50, a target which implies a 16.1% potential ceiling from today's prices.
One of the main upsides to investing in REITs is exposure to real estate, which is the go-to asset class for investors looking to generate passive income.
In the case of Prologis, shareholders can count on a 2.83% annual dividend yield, which is just one of the ways the company rewards its investors. Another way management rewards shareholders is by making acquisitions, expected to amount to $300 to $600 million for 2023.
New acquisitions will not only increase income for the company but also raise the portfolio's value through an increase in stock value.
