Public Storage keeps hitting new highs. This seemingly unremarkable business has been one of Wall Street’s top performers for more than a decade now. The stock is up a surprising 40% for 2015 so far, and it has increased in value seven-fold since the financial crisis.
You would think that the business of renting people extra store space for household junk would not be particularly lucrative. But you would be wrong.
Public Storage shares have been up ever single year in succession since 2009, and they have never fallen by more than 15% even once during the incredible 600% rally since financial crisis lows.
If there is one thing the average American loves to do, it is to hoard things. We are infamous for being pack rats. Reality television is full of shows involving public storage, where bidders hope to recover small fortunes from abandoned units.
Public Storage, by allowing people to hold onto to cherished things without having to buy a bigger house or clutter up their living space, gives people a most desirable of goods at a relatively affordable price.
And unlike many products, Public Storage has a near 100% customer renewal rate. Once you have gone to the trouble of hauling your excess stuff to an offsite unit for safekeeping, you are unlikely to move it back and vacate the unit all that quickly. Public Storage has phenomenal retention rates, it is among the best types of subscription or renewal revenue products available.
Public Storage’s margins show that to be true. The company earns a gross margin of 73%. Every dollar they bring in, they keep 73 cents after paying all the expenses associated with owning and operating the storage unit. That’s insanely good.
The profit margin, which is after all costs including taxes, is at a similarly eye-popping 44%. Come rain or shine, this company is minting money turning people’s trash into gold.
If you look at the stock chart, Public Storage has been a straight line up for more than 6 years now. All the stock price does is go straight up, and they pay a healthy and rapidly increasing dividend as well. So why shouldn’t we pour a ton of our investment funds into this tomorrow?
That’s a good question, however there is a good answer as well. Wall Street has become fully aware of how great a business offsite storage is. Public Storage shares have been bid to very pricey levels on valuation.
Currently, Public Storage hails at a 41 PE ratio, which is alarmingly high, even for sexy businesses. And this is not one of those. The forward PE is 36, indicating that expected earnings growth is fairly slow. Offsite storage is a steadily growing business, but it isn’t one growing at a rapid pace. Consumers accumulate new trinkets to be stored at a rather gradual and steady rate.
Other valuation ratios are exceedingly high. The PEG ratio at 7 is almost otherworldly. The Price/sales ratio of 18 and Price/book ratio in excess of 8 would also cause the average value investor to suffer heart palpitations.
The company pays a reasonable 2.8% dividend yield, but in order to do so, it is forced to pay out 100% of its annual profits as dividends. That’s fine, it is the REIT model after all, but it suggested that as a source of income, this will never be at the top of the pile.
The company is also attracting more competition. For awhile, Public Storage had a virtual monopoly in the area, but new competitors are piling in. Other entrants such as Sovran Self Storage and Cubesmart have also become Wall Street darlings, with rocketing share prices and rapid growth.
Americans love to hoard stuff, the market is big and growing for offsite storage. That said, if a bunch of companies all come in and try to be the next Public Storage, so to speak, then it is likely the space will be built out and rental prices will stabilize or drop.
On the plus side, Public Storage has one more key weapon. They tend to own many of the land parcels that sit under their outlets. Cheaply built warehouse space is a low cost use of land.
However that land provides optionality, with many locations in city centers, Public Storage can later redevelop or sell pieces of land that have appreciated in value and become prime lots of residential or commercial development. It’s a free option on a diversified basket of real estate markets across the country.
With Public Storage up 40% year to date and sitting at all time highs, it is hard to say buy now. But it is a great company, one that will likely continue to appreciate in value. Its land holdings offer an additional hidden catalyst. While storage may not be glamorous, Public Storage’s business is worthy of inclusion in most investors’ portfolios.
