Prologis (PLD) set for long-term gains from high e-commerce demand

The ripples of the COVID-driven e-commerce boom are being felt beyond the retail industry, and the other sectors influenced by it include transportation and real estate. The high demand for commercial space from e-commerce companies, for managing storage and distribution of merchandise effectively, has come as a boon for warehouse giant Prologis Inc (NYSE: PLD).

After expanding its real estate footprint steadily and adding some of the top corporates into the customer network, Prologis continues to strengthen its assets through strategic initiatives like the recent acquisition of Duke Realty. It is estimated that e-commerce penetration, which accelerated during the pandemic, would more than double in the next few years.

Valuation

PLD is one of the few stocks that remained resilient to the recent market selloff, and it made steady gains for most of the first half before withdrawing to a one-year low a few weeks ago. Still, the valuation looks high in relation to the company’s earnings, thanks to the high investor demand. But the fact that Prologis is a thriving business with strong fundamentals and its industrial properties continue to attract customers justify the valuation.

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Prologis Q1 2022 Earnings Call Transcript

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Wating for the price to dip further might not help because analysts’ average target price points to a sharp rebound in the near term, which might drive up the stock beyond the recent peak in the next twelve months. Right now, the undisputed leader in the REIT space offers an investment opportunity worth considering.

e-Commerce Effect

The San Francisco-based firm generates a sizeable portion of its revenue from tie-ups with industry leaders like Amazon.com Inc.  (NASDAQ: AMZN) and Home Depot Inc. (NYSE: HD). It has leased commercial space, including warehouses and distribution centers, for a total area of one billion square feet to customers across the globe. In the coming years, store operators and online retailers will require additional space to meet the high demand, which bodes well for Prologis.

From Prologis’ Q1 2022 earnings conference call:

“In our essentials business, we’re working to provide end-to-end solutions for our customers beyond the real estate, which is providing new sources of revenue. This includes energy solutions where we are leading the way with solar, storage, and EV charging and notably, we crossed a hundred megawatts of power production this quarter, and will add another 20% by year-end, dramatically accelerating our pace.”

Key Numbers

Interestingly, the average occupancy rate for the company’s properties was around 97% at the end of last year. In the first quarter of 2022, core funds from operations rose sharply to $1.09 per share from $0.97 per share a year earlier. The bottom line benefited from a 6% increase in revenues to $1.22 billion. The results topped expectations. The company will be publishing second-quarter results on July 18, before the opening bell. The consensus estimate is for a 27% decrease in net earnings to $0.59 per share. Meanwhile, revenue is seen rising 8% annually to $1.1 billion.

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Walmart cuts profit outlook as inflationary pressures are expected to persist

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Earlier this month, Prologis announced the acquisition of rival Duke Realty for $26 billion. The deal will allow the company to add Duke’s premium properties into its portfolio in key geographies like Southern California, New Jersey, and Atlanta.

Prologis’ stock has declined about 6% in the past 30 days, extending the downtrend that started in April. Trading below its long-term average, PLD traded slightly lower on Friday afternoon.