One of the cheapest stocks in our All Investable Stock Screener is RMR Group Inc (NASDAQ:RMR).
The RMR Group Inc. (RMR) is a holding company and substantially all of its business is conducted by its majority-owned subsidiary, The RMR Group LLC. The RMR Group LLC is an alternative asset management company that was founded in 1986 to invest in real estate and manage real estate related businesses. RMR’s business primarily consists of providing management services to four publicly owned real estate investment trusts, or REITs, and three real estate related operating companies. As of March 31, 2017, The RMR Group LLC had approximately $27.6 billion of total assets under management, including more than 1,400 properties, and employed over 475 real estate professionals in more than 35 offices throughout the United States.
A quick look at RMR’s share price history over the past twelve months shows that the price is up 45%, but here’s why the company still remains undervalued.
The following data is from the company’s latest financial statements, dated March 2017.
The company’s latest balance sheet shows that RMR has $133 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has zero debt. Therefore, RMR has a net cash position of $133 Million (cash minus debt).
If we consider that RMR currently has a market cap of $789 Million, when we add the minority interests of $146 Million and subtract the cash totaling $133 Million that equates to an Enterprise Value of $802 Million.
If we move over to the company’s latest income statements we can see that RMR had $145 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 5.54, or 5.54 times operating earnings. That places RMR squarely in undervalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that RMR generated trailing twelve month operating cash flow of $128 Million and had $0 Million in Capex. That equates to $128 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 16%.
RMR’s free cash flow of $128 Million (ttm) and net income of $44 Million (ttm) are at historical highs. While the company’s current revenues of $268 Million (ttm) are inline with FY2016, RMR has improved its EPS by 19% to $2.77 (ttm) from $2.33 in FY2016 and its book value per share by 19% to $4.66 (ttm) from $3.79 in FY2016. Additionally, RMR now has a record high $133 Million in cash on its balance sheet while maintaining zero debt.
Something else which seems to get overlooked regarding RMR is its annualized Return on Equity (ROE) for the quarter ending March 2017. A quick calculation shows that the company had $141 Million in equity for the quarter ending December 2016 and $145 Million for the quarter ending March 2017. If we divide that number by two we get $143 Million. If we consider that the company has $44 Million (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending March 2017 of 31%.
As for RMR’s current valuation, the company is currently trading on a P/E of 17.7, a FCF/EV Yield of 16%, and an Acquirer’s Multiple of 5.54, or 5.54 times operating earnings. RMR has an annualized Return on Equity (ROE) for the quarter ending March 2017 of 31%, plus a dividend yield of 2%. All of which indicates that the company remains squarely in undervalued territory.
About The All Investable U.S. Stock Screener (CAGR 25.9%)
Over a full sixteen-and-one-half year period from January 2, 1999 to July 26, 2016., the All Investable stock screener generated a total return of 5,705 percent, or a compound growth rate (CAGR) of 25.9 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 265 percent, or 5.7 percent compound.
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