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 which conducts its business through its subsidiary RMR Group LLC. The RMR Group LLC is an alternative asset management company which invests in real estate and manage real estate related businesses. The company’s business primarily consists of providing management services to publicly owned real estate investment trusts, or REITs, and real estate related operating companies. It also provides management services to real estate securities mutual fund and commercial real estate finance company. The company operates through single segment being RMR LLC. The RMR Group derives its revenue from providing business and property management services as well as advisory and other services.

A quick look at RMR’s share price history below over the past twelve months shows that the price is up 77%, but here’s why the company remains undervalued.

(SOURCE: GOOGLE FINANCE)

The following data is from the company’s latest financial statements, dated March 2018.

The company’s latest balance sheet shows that RMR has $276 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 $276 Million (cash minus total debt).

Financial strength indicators show that the company has a Piotroski F-Score of 8, an Altman Z-Score of 21.02, and a Beneish M-Score of -3.72 All of which illustrate that the company remains financial strong.

If we consider that RMR currently has a market cap of $1.398 Billion, when we subtract the net cash totaling $276 Million and add back the minority interests of $209 Million, that equates to an Enterprise Value of $1.331 Billion.

If we move over to the company’s latest income statements we can see that RMR has $252 Million* in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 5.28, or 5.28 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 $231 Million and had $1 Million in Capex. That equates to $230 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 17%.

In terms of RMR’s annualized Return on Equity (ROE) for the quarter ending March 2018. A quick calculation shows that the company had $217 Million in equity for the quarter ending December 2018 and $223 Million for the quarter ending March 2018. If we divide the combined total of both numbers by two we get $220 Million. If we consider that the company has $91 Million in net income (ttm), that equates to an annualized Return on Equity (ROE) for the quarter ending March 2018 of 41%.

Other considerations regarding RMR include the company’s trailing twelve month revenue of $390 Million, which is higher than any one of the full-year revenues posted in the past five years. The company’s net income of $91 Million (ttm) is the highest in the past five years and 116% higher than the FY2017 net income of $42 Million. Lastly, RMR’s free-cash-flow of $230 Million (ttm) is 84% higher than the $125 Million recorded for FY2017, and a record high in the past five years.

Summary

In summary, RMR is trading on a P/E of 15.3 and an Acquirer’s Multiple of 5.28, or 5.28 times operating earnings. The company has a strong balance sheet with a net cash position of $276 Million and zero debt.  Financial strength indicators show that RMR is financially sound with a Piotroski F-Score of 8, an Altman Z-Score of 21.02, and a Beneish M-Score of -3.72. The company also generates a FCF/EV Yield of 17% (ttm) and has an annualized return on equity of 41% for the quarter ending March 2018. RMR’s revenue of $390 Million (ttm), net income of $91 Million (ttm), and free-cash-flow of $230 Million (ttm) are all record highs in the past five years.

Superinvestors Currently Holding Positions In RMR include:

There are a number of superinvestors currently holding positions in RMR including Cliff Asness, T. Rowe Price, Jim Simons, Chuck Royce, James O’Shaughnessy, and Paul Tudor Jones.

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