Stripnomics

It’s early in the year but I don’t know if I’ll be lucky enough to find a company with more pathetic fundamentals than American Campus Communities (”ACC”) in the next 12 months. I sure hope I’m wrong but I just can’t envision being lucky enough to find another company so fundamentally overpriced. I’m guessing the stock remains relatively high because the market thinks it is ”defensive” area. The market is wrong. 

ACC is a real estate investment trust (a “REIT”). REITs are my favorite short candidates in this environment as I know commercial real estate really well and I know there was a huge financing bubble that could not be sustained and blew acquisition prices to the moon. Further, ACC has impeccable timing and completed the most boneheaded purchase of GMH Communities Trust on June 11, 2008, during the worst real estate crisis in memory - BRAVO!

According to their website:

“American Campus Communities is one of the nation’s largest developers, owners and managers of high-quality student housing communities.” (Hmmm, where have I heard that kind of language before?)

Basically, they run private dorms - including some very swanky ones! Look at the video below. A few of the people that I told about ACC’s problems commented that demand for dorms and student housing should be always be strong and doubted it would be a good short candidate. While I don’t disagree that demand for student housing is generally stable, this is the wrong direction to take when analyzing a stock. You can’t assume that just because there is demand for the product that the business is good. You have to read the 10q’s and 10k’s! You have to dig into the numbers.

As I said, it is a false assumption to think that strong demand for student housing will equate to ACC being a good stock. What’s really important is PROFIT! Unfortunately, ACC fails miserably in this regard. They have an outrageous cost structure. They don’t just simply collect rents from students - they also feed them, cleanup after them and provide them with gorgeous pools and hot tubs. This is not the best profit model, particularly when non-profits do it too. However, if you are altruistic (something a capitalist pig like me does not understand) and simply wish to provide food and housing to rowdy college students without regard for the bottom line of your investment, be my guest and buy the stock.

To be honest, I think the whole business concept was not well conceived. Who came up with the idea to start a for-profit REIT that would primarily compete against non-profits? Hello McFly - there is a reason why dorms are usually run by non-profit organizations! Schools run dormitories to provide a necessary service to a class of people that society wants to subsidize to encourage education. Even if we assume that demand for dormitories relatively stable in a down economy, I’ll bet they will still feel pain. There isn’t exactly a shortage of empty houses (particularly in speculative college towns) for rent! 

Anyhow, let’s get down to some analysis. Since my PLD Trade, I’ve gotten feedback that my analysis was too complicated and indecipherable. Therefore, I’m going to start with the very basics.

EARNINGS:

Earnings are typically measured with a few metrics. The most important is Earning Per Share (EPS). The number represents the amount of profit allocated to each share of stock. The formula for EPS is:

EPS = ( Net Income - Preferred Dividends ) ÷ # of Shares Outstanding

EPS can also be undiluted or diluted. Personally, I like to use diluted EPS when evaluating a stock because it is the most conservative metric as it takes into account the potential exercise of all convertible securities like convertible bonds, stock options, warrants, etc.  

Here is a screengrab from Google Finance showing ACC’s undiluted EPS:

 

Here is a screengrab from Yahoo Finance (they use diluted EPS):

As you can see, the EPS is a lousy 3¢ [Undiluted] or -11¢ [Diluted]. Regardless of which EPS metric you use, the numbers suck. I venture to say that I would do better investing my $20 on a lemonade stand run by a couple of 12 year olds! I’d make more than 3 pennies and probably get all my money back after a year. I doubt that will be the case with ACC.

If you use the straight numbers, the company barely makes anything. Attribute that to the cost structure. If you look at the diluted numbers, it is a bigtime loser. Why the huge difference? Do you know the significance of the difference? I do but that’s another post.

P/E RATIO

Let’s look at another very simple and common metric: Price to Earnings Ratio (P/E Ratio). The formula for P/E Ratio is:

P/E Ratio = Share Price ÷ EPS

If you look at the above screengrabs you’ll notice I circled those metrics as well. Using the undiluted EPS metric, the P/E Ratio is a whopping 602.16 according to Google. If you use the Yahoo diluted EPS number, the P/E ratio is: N/A.  That’s right “N/A”"! That’s because you cannot divide with a negative number!

How do those P/E Ratios compare with other stocks? Well here is a historical chart from BullandBearWise.com:

Is’nt that just lovely? ACC wouldn’t even appear on this graph since its P/E Ratio is so out of touch with reality! What do you think the stock price would be if if had a P/E Ratio that could fit on this chart?

Now I know some wide-eyed dreamers out there are going to say that this is a growth stock and that its okay to have a high P/E Ratio. Sorry, but real estate isn’t exactly a growth industry right now and no sector is immune from the downturn.

ACC’s management would disagree. In fact, earlier today they went so far as to release its leasing PRE-APPLICATION metrics for the 2009-2010 school year. Keep in mind that this is not money received. Of course, I’m not surprised given the mindset of all these REIT speculators that bought & financed think price would keep going up, up, up. They have a tendency to count their chickens before they’re hatched. If you honestly believe that there isn’t going to be some negative economic impact in this stock, you should buy this stock then immediately write a letter to Santa asking for a Ferrari next year.

I know those of you that believe in “Buy & Hold” and think you understand Warren Buffett will challenge me on the dividend, REIT tax requirements, F.F.O. ( a fallacy), earnings growth, the management team, the property values, the book value, etc., etc., blah, blah, blah. I will tell you that you are wrong and I challenge you to bet against me.

If you want to hear what I have to say about those issues and ACC stay tuned! I will address all of these matters in the coming weeks.

Until then, enjoy this bullish plug on ACC from Wallstrip. I obviously disagree with their assesment but the girl sure is cute.  Be sure to keep an eye out for the fancy digs. Luxury sells bigtime in recessions!

This entry was posted on Thursday, January 15th, 2009 at 12:58 am and is filed under Accounting, Economics, Real Estate, Trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.