About Simon Property Group
I have no problem admitting that one of the main reasons I became interested in analyzing Simon Property Group’s stock is because one of the company’s founders, Herbert Simon owns an NBA team from the Midwest, the Indiana Pacers.
Yes, I’m a sports nerd and yes that is pretty much what prompted my team and I to perform a stock analysis on the company.
It would be cool if the Pacers were publicly traded, but I guess Simon Property Group (SPG) will do.
However, all of my nerdiness aside SPG is not one of the largest mall developers, owners and operators in the United States, but the largest. In fact, reports from years ago claim that SPG owns and operates around 108 malls along with 72 discount outlet centers.
The company primarily makes money from rental income generated from mall tenants such as people who rent kiosk space and store space at their malls. However, we’d like to note that SPG has also made money by participating in financially distressed retail turnarounds. Specifically, when Aeropostale was in a financial pinch, SPG was one of the partners that invested to get the company out of bankruptcy, turn it around and of course doing this all after buying the company at a huge discount.
While this is interesting, our team wouldn’t consider this a reliable source of income since these types of investments are situational and event driven by nature. It’s not every day that a once popular and well-liked apparel chain files for bankruptcy and is begging for a buyer to purchase the company at a bargain price.
All in all, we’d like to mainly consider the primary way in which the company makes money, which is income from their mall tenants.
After a brief overview of the company, what they do and how they make money, let’s get a better feel for SPG and its financials.
Simon Property Group’s stock financials
As of this publication the mall operator’s share price is trading just below $107 with a market capitalization of around $34 billion and a price-to-earnings (P/E) ratio of 15.36.
Their P/E ratio hints that the stock is undervalued given that a P/E ratio of 20 is generally considered to indicate that a company’s stock is trading at fair value while below 20 is considered undervalued and above is overvalued.
We should also note early on that the company pays out an unusually high annual dividend of $6.80.
Whether or not one thinks the company can afford to keep paying this dividend moving forward is a question worth considering in the back of your mind as we further explore SPG’s financials.
As it relates to the balance sheet, the company’s management oversees nearly $34 billion in total assets and around $30 billion in total liabilities. While in previous cases we’d usually consider this amount of total liabilities to be unfavorably high, this isn’t very surprising given that most of their business is tied into real estate, which is an industry built upon debt-heavy, long-term investments.
We’re just thankful that their total assets outweigh their total liabilities at all.
Moving onto the company’s income statement, their total annual revenue has been fairly consistent over the past five years, which is no small accomplishment given the recent market shocks presented in 2019 to now.
Specifically, in 2017 their total revenue stood at around $5.5 billion and has been in the $5 billion range each year (over the past five years) except in 2020, where it dropped to around $4.6 billion.
Our team expected a much larger drop in total revenue during 2020, however an approximate $400 million loss isn’t as bad as it could’ve been given that so much was shut down (including malls, of course) during 2019 and 2020. Nevertheless, we were pleasantly surprised that their total revenue didn’t drop by much, at least, when considering the big picture.
As it relates to the company’s cash flow statement, it paints a similar picture to the company’s total revenue over the past five years. Specifically, their net income was fairly consistent in the $2 billion range and then there was a sizeable drop in 2020, down to just under $1.3 billion.
We find it encouraging that after the drops in both revenue and net income in 2020 their numbers in 2021 came back up to normal, consistent previous levels.
Maybe there’s still demand for malls after all!
Malls before and after COVID-19
This seems like an opportune time to briefly explain our views on the future of malls, as it’s pretty much the bedrock of the industry that SPG dominates.
It’s our view that the potential for growth in the mall as we currently know it is slim to none. Over the past decade it has become significantly easier to purchase just about anything online, and even cheaper when compared to buying something at a mall. We understand that going to the mall is definitely still an “experience” for many but consumers walking around a mall doesn’t directly generate revenue for SPG’s tenants.
If their tenants are suffering, it wouldn’t be surprising if SPG was hurting as well.
Suffice it to say our team’s views on the contemporary mall are not exactly rosy.
Additionally, at first glance we don’t really see many options for SPG to reinvent itself or make malls what they used to be.
While this is by no means the fault of SPG or its executive team, it’s a major issue that could eventually lead to the company’s demise in the long run.
Simon Property Group’s stock fundamentals
On a more positive note, when it comes to the company’s ability to turn a profit, they do a phenomenal job. Particularly, their trailing twelve month (TTM) net profit margin stands at around 50% compared to the industry’s 32.38%, according to TD Ameritrade’s platform.
In addition to their strong ability to generate a profit, their TTM returns on equity, assets and investment are all notably higher than that of the industry average, which is a huge plus.
Should you buy Simon Property Group stock?
This is probably one of the toughest calls we’ve had to make for the long term.
The company’s overall numbers are quite solid and they are the largest mall operator in the United States. However, given our views regarding the future of today’s mall mixed with evolving consumer habits, while we’d love to give the company a “buy” rating, we currently deem a “hold” rating to be more appropriate.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.