10/21/2017

Quarterly Focus List Highlight – Store Capital Corp (NYSE:STOR)

Overview: STORE Capital Corporation (NYSE:STOR) is an internally managed net-lease real estate investment trust. The Company is engaged in the acquisition, investment and management of single tenant operational real estate (STORE) properties. As of December 31, 2016, the Company owned a portfolio that consisted of investments in 1,660 property locations operated by 360 customers across 48 states. Its customers operate across a range of industries within the service, retail and manufacturing sectors of the United States economy, with restaurants, early childhood education centers, movie theaters, health clubs and furniture stores. The Company’s portfolio includes investments in approximately 1,330 property locations operated by over 300 customers across 48 states. The Company provides real estate financing solutions principally to businesses that own STORE properties and operate within the broad-based service, retail and industrial sectors of the United States economy.

Tenant Diversity: As of March 31, 2017, the company’s largest customer represented roughly 3% of the total investment portfolio. STOR owns properties for many well-known brands including Applebee’s, Ashley Furniture HomeStore, O’Charley’s, AMC (theaters), Sonic Drive-In and others. The firm has a good mix of clients in different industries, regions and with target customers.

Catalysts

Berkshire Acquisition: STOR recently disclosed that Berkshire Hathaway had purchased a 9.8% stake in the company. The stock jumped roughly 11% that day, and has held near that level since. We believe that the acquisition could help stabilize STOR and propel the stock upward. Over the past year, we feel that the intrinsic value of the business has increased while the stock price has fallen nearly 30%. We are optimistic that Berkshire ownership will push investors to look closer at the firm’s fundamentals and realize the value that we see.

Consumer Confidence and STOR’s Tenants: US Consumer Confidence levels remain near record highs. Nearly 25% of STOR’s properties are in industries including furniture stores, early childhood education centers, health clubs, and lawn/garden equipment stores, which will benefit directly from higher levels of discretionary spending. Additionally, Other Service Industries account for another 25% of properties and should also benefit from higher levels of discretionary spending. Finally, the firm has limited exposure to industries that are currently experiencing downturns such as lower end restaurants (total restaurants are 21% of properties), automotive repair and maintenance (3% of properties) and general retail (8% of properties).

Financial Metrics: We believe STOR stock is attractively priced at a ~30% discount to our intrinsic value estimate. From a conventional financial metrics’ perspective, STOR also appears very appealing. STOR currently trades at a trailing 12month P/E of ~15, pays a 5% dividend, grew top line sales by 75%, 50%, and 32% over the past three years and is forecasted to grow sales at 23% and 16% in the next two years. In addition, EBITDA margins have continuously improved over the past five years, growing from 46.58% in 2012 to 61.73% last year. If top line forecasts come true and margins continue to improve, we are confident that investors will pile into this deeply undervalued firm.

Overall, we feel that STOR has an attractive valuation and could be bid upward due to recent events. The Berkshire Hathaway acquisition could lead to lower borrowing costs and gather interest in the stock from other investors. Furthermore, the company’s tenants could be helped by increases in consumer spending, leading to a less risky client base. Finally, both traditional financial measures and our proprietary intrinsic value estimate suggest STOR is a very attractive investment.