Realty Income Corp. (O – Free Report) is one of the most followed stocks by Zacks.com visitors lately. As such, it might be a good idea to review some of the factors that could impact the stock’s near-term performance.
Over the past month, shares in this real estate mutual fund have returned +2.8%, compared to a +2.2% change in the Zacks S&P 500 Composite. During this period, the industry added Zacks REIT and Equity Trust – Retail, to which Realty Income Corp. heard, increased by 4.5%. The crucial question now is: What could the future direction of the stock be?
Although media reports or rumors of a significant change in a company’s business prospects usually cause the stock to trend and result in an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.
Revisions to earnings estimates
Here at Zacks, we prioritize evaluating the change in forecasting a company’s future earnings over anything else. That’s because we believe the present value of its future earnings streams determines the fair value of its stock.
Essentially, our analysis is based on how sell-side analysts who cover the stock revise their earnings estimates to reflect the latest business trends. As earnings estimates for a company increase, so does the fair value of its stock. And when a stock’s fair value is higher than its current market price, investors tend to buy the stock, causing its price to move higher. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
For the current quarter, Realty Income Corp. expected earnings of $0.99 per share, a +5.3% change from the year-ago quarter. The Zacks consensus estimate is down -0.3% over the last 30 days.
Consensus earnings estimate of $3.96 for the current fiscal year indicates a change of +10.3% year-on-year. This estimate has changed by -0.3% in the last 30 days.
For the next fiscal year, the consensus earnings estimate of $4.06 shows a +2.7% change from what Realty Income Corp. expected to report a year ago. Over the past month, the estimate has changed by -0.3%.
With an impressive, third-party audited track record, our proprietary stock ranking tool – the Zacks Rank – is a more meaningful indicator of a stock’s short-term price performance because it effectively harnesses the power of earnings estimate revisions. The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks rank of #3 (Hold) for Realty Income Corp.
The chart below shows the development of the company’s 12-month consensus EPS estimate:
12 Month EPS
Projected sales growth
While a company’s earnings growth is arguably the best indicator of its financial health, not much happens if it can’t grow its revenue. It’s almost impossible for a company to grow its profits without increasing its revenue over long periods of time. Therefore, knowing a company’s potential revenue growth is crucial.
For Realty Income Corp. The consensus revenue estimate for the current quarter of $853.29 million indicates a +24.6% year-on-year change. For the current and next fiscal year, estimates of $3.3 billion and $3.61 billion indicate changes of +58.5% and +9.3%, respectively.
Latest reported results and surprise history
Realty Income Corp. reported revenue of $837.27 million for the most recent quarter, a +70.2% year-over-year change. EPS of $0.35 for the same period compared to $0.91 a year ago.
Compared to the Zacks Consensus estimate of $828.53 million, reported earnings represent a surprise of +1.06%. EPS surprise was +2.08%.
The company beat consensus estimates for earnings per share in each of the last four quarters. The company beat consensus sales estimates every time during this period.
valuation
No investment decision can be efficient without considering a stock’s valuation. Whether a stock’s current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects is a key factor in future stock price performance.
Comparing the current value of a company’s valuation multiples, such as B. Price to Earnings (P/E), Price to Sales (P/S), and Price to Cash Flow (P/CF), with its own historical values help determine whether the stock is Fairly Valued, Overvalued or Undervalued while making the comparison of the company relative to its peers based on these parameters gives a good indication of how reasonable the stock price is.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which assesses both traditional and unconventional valuation metrics) organizes stocks into five groups from A to F (A is better than B; B is better than C; and so on), making it helpful in determining whether a stock is overvalued, correctly valued, or temporarily undervalued.
Realty Income Corp. is rated F on this front, indicating it is trading at a premium to its peers. Click here to view the values of some of the assessment metrics that led to this grade.
Conclusion
The facts discussed here and plenty of other information on Zacks.com could help determine if the market buzz about Realty Income Corp. is worth playing on. to pay attention to or not. However, its No. 3 Zacks rank suggests it could move in line with the broader market in the near future.
