Vornado to Benefit From Lower Vacancies

BOSTON ( TheStreet Ratings) -- Vornado Realty Trust ( VNO) is scheduled to report quarterly earnings after the market close on Monday, and analysts expect that improved vacancy rates will boost the company's bottom line .

Analysts are expecting Vornado to report second-quarter funds from operations (FFO) of $1.16 a share, compared with $1.11 in the year-ago quarter. Revenue is estimated to decrease to $683.6 million from $696.1 million a year ago, according to a poll of analysts by Thomson Reuters. The company should continue to benefit from improvements in vacancy rates throughout its portfolio of shopping centers and malls.

The following is taken from a first-quarter report published by TheStreet Ratings, an independent-research unit of TheStreet that uses a quantitative model to evaluate stocks.

Vornado improved earnings per share by 28% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. During the past fiscal year, Vornado increased its bottom line by earning $3.35 versus 9 cents in the prior year.

We rate Vornado a buy. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. Our model has a price target of $117 on shares of Vornado, offering the potential for 24% upside from current levels.

The company's strengths can be seen in multiple areas, such as its increase in stock price during the past year, impressive record of earnings per share growth, compelling growth in net income, revenue growth and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow.

Vornado's gross profit margin is 42.60%, which we consider to be strong. Regardless of VNO's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, VNO's net profit margin of 45.80% significantly outperformed against the industry.

>>For upcoming earnings and estimates, see our Earnings Calendar.

Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.

From a valuation perspective, Vornado's current price-to-earnings ratio indicates a significant discount compared to an average of 93.70 for the Real Estate Investment Trusts (REITs) industry and a premium compared to the S&P 500 average of 16.00. For additional comparison, its price-to-book ratio of 2.60 indicates a premium versus the S&P 500 average of 2.15 and a premium versus the industry average of 2.57. The price-to-sales ratio is well above the S&P 500 average, but well below the industry average.

Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser. Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

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