FINC 330 Research Project Part 3

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FINC 330 Business Finance Research Project 3 Introduction Determining the likelihood of bond and stock performance is an essential component of capital investment. Decisions to invest versus decline investment in Prologis will be determined by evaluating the data on bond and stock performance. Stock performance will be compared to a competitor, American Tower Corporation. Whether or not the client will invest in Prologis will be decided after a thorough investigation of the risks versus rewards of investing in Prologis. Bond Analysis Table 1. Prologis L P Bonds (FINRA, 2023) PLD Bond 1 PLD Bond 2 Last Price 98.32 112.30 Bond Price (LP*$1,000) $983.20 $1,123.00 Coupon Rate 5.25% 3.75% Coupon Interest Payments (CR*$1,000) $52.50 $37.50 Current Yield (CIR/BP) 5.34% 3.34% YTM 5.36% 0.89% PLD Bond 1 offers a discount, selling at 98.32% of the $1,000 par value while PLD Bond 2 is selling at a premium at 112.30% of the $1,000 par value. This means that Bond 2 is $139.80 more expensive to purchase. Bond 1 offers a 1.5% higher coupon rate than Bond 2, equating to $15 more in coupon interest payments per year from Bond 1 than Bond 2. Bond 1 current yield,

coupon interest payments divided by bond price, is 2% higher than Bond 2. Bond 1 yield to maturity is also 4.47% higher than Bond 2. Based on all these factors, I would choose to purchase Bond 1 for Prologis Inc. Neither bond is callable, and this does not impact my decision to purchase the bond. The call feature allows the issuer, Prologis Inc., the opportunity to repurchase the bond prior to maturity at the call price. This would impact the amount of coupon interest and yield the investor could make on the bond. Often the call premium is equal to one year of coupon interest plus compensation for the premature call. Since these bonds are not callable, Prologis does not have the option to call the bond if coupon interest was higher than the market interest rates. The lack of a call feature eliminates the possibility of market interest rates dipping below the coupon rate, further supporting the decision to purchase PLD Bond 1. Bond 1 has a Moody’s credit rating of A3, and Bond 2 does not have a Moody’s credit rating available. An A3 Moody’s rating places Bond 1 between lower medium credit and upper medium credit, closer to upper medium credit. This range is within the investment grade bonds category, typically a safe investment with lower chances of default. This credit rating also bolsters the decision to purchase Bond 1 while the lack in credit rating available detracts from the value of Bond 2. As an investor looking for a bond to invest in, Bond 1 is the best choice between the two bonds evaluated. Bond 1 investment price is $139.80 less than Bond 2. Bond 1 yields $15 more in coupon interest payments each year than Bond 2. Bond 1 current yield is 2% higher than Bond 2. Bond 1 has a yield to maturity rate 4.47% higher than Bond 2. Both bonds are non-callable and can be held to maturity. Bond 1 has an investment grade credit rating of A3 by Moody’s while bond 2 has no rating available. Bond 1 has shown a lower investment price, higher coupon

interest payments, higher current yield rate, higher yield to maturity rate, the ability to be held to maturity, and better credit rating. These factors all support the decision to invest in Prologis Bond 1. The financial leverage and debt/equity ratios previously examined for Prologis Inc support the decision to invest in Bond 1. Prologis has a much higher net profit margin while maintaining a lower financial leverage ratio when compared to their competitors. Prologis also has a lower debt to equity ratio, making them much less leveraged than their competitors. Prologis’s financial viability soon is positive, and Bond 1 matures in 2053, leaving many non- callable years for coupon interest payments, while Bond 2 only offers returns until its 2025 maturity date. Table 2. Prologis Inc. PLD Valuation (Morningstar, 2023) PLD Price/Earnings Ratio Price/Cash Flow Ratio Price/Book Ratio Price/Foward Earnings PEG Ratio Dividends per Share 2022 20.91 24.22 2.95 46.95 4.06 3.16 2021 63.53 44.64 3.84 82.64 10.18 2.52 2020 44.69 24.56 2.30 59.17 5.43 2.32 Table 3. American Tower Corp. Operating AMT Valuation (Morningstar, 2023) AMT Price/Earnings Ratio Price/Cash Flow Ratio Price/Book Ratio Price/Foward Earnings PEG Ratio Dividends per Share 2022 33.68 30.57 15.7 47.17 3.44 5.86 The price/earnings (P/E) ratio represents a stock’s valuation when compared to its industry or the S&P 500 and is determined by dividing the market price per share by earnings per share. (Murphy, 2023). PLD is lower in 2022 than AMT’s price/earnings ratio. This could have a few different indications. AMT could have a higher P/E ratio because investors expect higher growth in the coming year. AMT stock could be overvalued while PLD is undervalued. Investors

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could also be more skeptical of PLD’s growth in the coming years when compared to its competitor, AMT. The median P/E ratio for the S&P 500 in Q4 of 2022 was 20.33 (CSI Market, 2023). Both companies' P/E ratios outperform the S&P 500, so both are expected to grow faster than the S&P 500 or are overvalued when compared to the S&P 500. Investors looking for potentially undervalued stock would purchase PLD while investors looking for a potentially fast- growing company would purchase AMT. The price/cash flow (P/CF) ratio compares the market value of a company’s stock to its operating cash flow and is equal to share price multiplied by number of outstanding shares all divided by operating cash flow (CFI Team, 2023). The more undervalued stock can be determined by comparing PLD’s versus AMT’s P/CF ratio. PLD has a lower multiplier at 24.22 when compared to AMT’s 30.57. This indicates that PLD is more of an undervalued stock than AMT. However, the S&P 500 P/CF ratio in Q4 of 2022 was 11.47, which may indicate that both AMT and PLD stock may be overvalued (CSI Market, 2023). Out of the two evaluated stocks, PLD is the more undervalued stock and may be more lucrative for investors. The price/book (P/B) ratio is equal to book value (assets-liabilities) divided by outstanding shares (book value per share) then take share price and divide it by book value per share to arrive at the P/B ratio (Bromels, 2023). The P/B ratio helps determine undervalued stocks as well as evaluating companies with inconsistent earnings (Bromels, 2023). PLD’s P/B ratio is more than 5 times lower than AMT’s in 2022. In Q4 of 2022, the S&P 500 B/P ratio was 4.03 (CSI Market, 2023). PLD’s P/B at 2.95 was even lower than the S&P 500, providing more supporting evidence that PLD’s stock is undervalued and the better stock to invest in. The price/forward (forward P/E) ratio is equal to the current share price divided by the predicted future earnings per share, and helps investors determine undervaluation or

overvaluation of a company’s stock (Bera, n.d.). Both AMT and PLD have higher forward P/E ratios than current P/E ratios, indicating that analysts expect both companies’ earnings to decrease. Both companies’ stocks are overvalued as of 2022. PLD’s forward P/E ratio is 55.46% higher than its current P/E ratio in 2022, while AMT’s forward P/E ratio is 28.60% higher than its current P/E ratio. Analysts believe that PLD’s earnings will decrease by a larger margin than AMT’s. The price-to-earnings-to-growth (PEG) ratio addresses one of the limitations of the P/E ratio by accounting for a company’s forecasted growth rate (Murphy, 2023). The PEG ratio is equal to the current P/E ratio divided by a projected growth rate for the future (Murphy, 2023). A lower PEG ratio is more desirable than higher (Kennon, 2022). Both companies have a PEG ratio much higher than one, with PLD’s 2022 ratio at 4.06 and AMT’s ratio at 3.44. PLD is slightly more overvalued considering the PEG ratio than AMT. A large limitation of the PEG ratio is its reliance on growth estimates for the future (Kennon, 2022). The PEG ratio is only as useful as how accurate the growth estimate becomes. Dividends per share (DPS) is the amount of dividends declared by a company for each outstanding share, and the formula is sum of dividends over a period divided by ordinary shares outstanding for that period (Chen, 2021). AMT’s dividends per share in 2022 were $2.70 higher than PLD’s. This metric is particularly important to investors because dividends per share represents income for the shareholder (Chen, 2021). Increasing DPS over time signals to investors that management believes earnings growth is sustainable (Chen, 2021). PLD does have increasing DPS over the last three years with the largest jump from 2021-2022. While AMT’s DPS was higher in 2022, PLD has shown consistent DPS growth.

After evaluating the P/E, P/CF, P/B, forward P/E, PEG, and DPS ratios for both PLD and AMT, a few conclusions could be drawn. First, both companies’ stocks are likely overvalued as of 2022. PLD’s stock is less overvalued than AMT’s. PLD also demonstrates a rising dividend per share, indicating that PLD management believes its growth is sustainable. Out of the two evaluated stocks, PLD is the stock which is more reasonable to invest in. Stockholders can expect prices of PLD stock to decrease in the short term due to the overvaluation and increase in the long term based on the consistently increasing dividend payout. Recommendations Prologis has a few indicators that its stock is undervalued compared to its competitor, AMT, though overvalued compared to the S&P 500. A lower projected growth is contributing to the much higher forward P/E ratio compared to the current P/E ratio. Prologis should expand offerings or focus efforts on increasing current market share. By investing in one or the other, PLD may stimulate growth in the company and thus lower its forward P/E ratio. With the PEG ratio of 4 analysts expect earnings to continue decreasing, which was true from the previous year. Prologis should focus on consistently increasing earnings by cutting costs and increasing revenue. Dividends per share have consistently increased in the last three years. Decreasing DPS could cause investors to lose faith in management’s belief of sustained earnings. Continuing the trend of increasing dividends will positively impact PLD’s value for shareholders. Prologis’s price-to- book ratio is much lower than its competitor. PLD is still trading for a premium, though undervalued when compared to AMT. PLD should focus on keeping its asset value high relative to liabilities. Taking on too many liabilities would increase the P/B ratio and make the stock less attractive. Increasing assets would decrease the P/B ratio and attract more investors.

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Reflection Through this assignment I have learned a lot about how to evaluate stocks through different ratios. I also learned how to compare different stocks. I learned how to evaluate bonds using various metrics and compare two different bonds. I could apply this knowledge to the workplace by having the knowledge to evaluate my own company’s stocks and bonds versus a competitor. I could then use those analysis skills to determine my company’s strengths and weaknesses versus the competitor to improve my company’s financial performance and attract more investors. This information applies to personal investing as well. The ability to compare different companies’ stocks and bonds is a useful investment skill which contributed to personal net worth as well as retirement strategy. References Bera, P. (n.d.). What is forward price-to-earnings? Capital. https://capital.com/forward-price-to- earnings-forward-pe-definition Bromels, J. (2023). Using the price-to-book ratio to analyze stocks. The Motley Fool. https://www.fool.com/investing/how-to-invest/stocks/price-to-book-ratio/ CFI Team. (2023). Price-to-cash flow ratio. https://corporatefinanceinstitute.com/resources/valuation/price-to-cash-flow-ratio/ Chen, J. (2021). Dividend per share (DPS) definition and formula. Investopedia. https://www.investopedia.com/terms/d/dividend-per-share.asp#:~:text=Key %20Takeaways-,Dividend%20per%20share%20(DPS)%20is%20the%20sum%20of %20declared%20dividends,of%20outstanding%20ordinary%20shares%20issued .

CSI Market. (2023). S&P 500. https://csimarket.com/Industry/industry_valuation_ttm.php? pc&sp5 FINRA. (2023). Prologis L P. https://www.finra.org/finra-data/fixed-income/bond? symbol=PLD5559747&bondType=CORP FINRA. (2023). Prologis L P. https://www.finra.org/finra-data/fixed-income/bond? symbol=PLD4306070&bondType=CORP Kennon, J. (2022). What is the price-to-earnings-to-growth ratio or PEG ratio? The Balance. https://www.thebalancemoney.com/using-the-peg-ratio-to-find-hidden-stock-gems- 357497#toc-limits-of-the-peg-ratio Morningstar. (2023). American Tower Corp AMT valuation. https://www.morningstar.com/stocks/xnys/amt/valuation Morningstar. (2023). Prologis Inc PLD valuation. https://www.morningstar.com/stocks/xnys/pld/valuation Murphy, C. (2023). Using the price to earnings ratio and PEG to assess a stock. Investopedia. https://www.investopedia.com/investing/use-pe-ratio-and-peg-to-tell-stocks-future/#toc- what-does-it-mean-when-a-company-has-a-high-pe-ratio