Storage Firm’s Fate Packed With ‘Ifs’

It’s not often you get two stock recommendations within hours of each other that are polar opposites. But that happened the morning of June 28. Motley Fool put out an article headlined “Two Great Stocks You Can Buy and Hold Forever,” with one of those great stocks being Public Storage, the self-storage giant headquartered in Glendale. Less than two hours later, an analyst writing for Seeking Alpha posted his article headlined, “Public Storage Is Dangerously Overvalued.” Since Public Storage is the third-biggest public company by market capitalization in our Valley area, let’s take a look at these dueling opinions, starting with the glowing one. Matthew Frankel likes the fact that Public Storage has generated “fantastic returns” over time. “In fact, since 1990, Public Storage has produced roughly six times the return of the S&P 500, and that period included one of the worst recessions in history,” he wrote. It enjoys a great competitive position since it is by far the largest self-storage company with 2,600 facilities, the Motley Fool article says. That means Public Storage can continue thriving in good times and remain profitable in bad. “Self-storage has lower maintenance, staffing and turnover costs than other types of real estate,” Frankel wrote, “and while Public Storage can break even with just 30 percent occupancy, it’s currently at around 95 percent. In other words, if a recession hit and Public Storage’s occupancy fell to, say, 80 percent, the company would still be a long way from becoming unprofitable.” Now let’s look at the opposing viewpoint. Dane Bowler, writing in Seeking Alpha, agreed that Public Storage has racked up an impressive record. But that may be about to change, he opined. For one thing, supply is booming. That’s because building a storage facility is profitable for a developer right now, and it’s relatively easy to construct. “Development in this sector is available to many and highly lucrative so we anticipate substantial supply coming in,” he wrote. Indeed, the company’s chief executive recently admitted that he sees up to 2,500 facilities coming on line the next couple of years. That’s almost the equivalent of an entire Public Storage – the largest in the industry – being added to supply. Sharply rising supply, of course, means more marketing costs and discounted rents. Already, the chief financial officer of Public Storage said he’s seeing “softness in demand” in the industry. The company has had to spend more money to keep demand about where it has been, he said in a recent conference call with analysts. And Bowler, the analyst, sees problems on the demand side as well. Notably, millennials don’t acquire stuff and hold onto it as their baby boomer parents do, and those who do have storage units may be more tempted today to sell their goods on several apps that have popped up. So, he concluded, less demand for storage space will be a trend, not a blip. “Self-storage has played out,” Bowler wrote. “We think the boom will be followed by a bust to restore market equilibrium. Within the self-storage industry, we believe Public Storage is one of the weaker players.” He sees a stock price of $137 a share; Public Storage had traded above $200 for a year when he made that call. On the other hand, Frankel, the Motley Fool writer, sees a bright future for the company. He bases his case on the strength of Public Storage. Since the company is well managed and has the most established position in the market, it may be able to vanquish weaker competitors if oversupply roils the market. “Public Storage’s brand and leading market share should allow it to do just fine as the market adapts to the new supply,” he wrote. Like I said, you seldom see such divergent views on the same stock at the same moment by analysts looking at the same facts. Time will tell, of course, which view is most accurate. For what it’s worth, which may not be much, the bearish case won the day that the dueling stories were released. Public Storage’s stock that day went down less than 1 percent while similar companies as a group went up 2 percent. Charles Crumpley is editor and publisher of the Business Journal. He can be reached at [email protected].