On 28th September 2023, Innovative Industrial Properties Inc (IIPR, Financial) witnessed a daily loss of 5.17%, despite a 3-month gain of 6.52%. With an Earnings Per Share (EPS) (EPS) of 5.65, the question arises: is the stock significantly undervalued? This article aims to answer this question through a detailed valuation analysis. We invite you to read on and delve into the financial intricacies of Innovative Industrial Properties (IIPR).
Company Introduction
Innovative Industrial Properties Inc is a real estate investment trust that acquires, owns, and manages specialized industrial properties leased to state-licensed operators for their regulated medical-use cannabis facilities. The company conducts its business through a traditional umbrella partnership real estate investment trust, or UPREIT structure, in which properties are owned by Operating Partnership, directly or through subsidiaries. Its property portfolio is spread across the United States.
Comparing the stock price with the GF Value, an estimation of fair value, allows for a deeper exploration of the company's value. This approach ingeniously integrates financial assessment with essential company details.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
The stock of Innovative Industrial Properties (IIPR, Financial) gives every indication of being significantly undervalued based on GuruFocus' valuation method. GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $ 73.51 per share, Innovative Industrial Properties stock gives every indication of being significantly undervalued.
Because Innovative Industrial Properties is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
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Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. Innovative Industrial Properties has a cash-to-debt ratio of 0.31, which ranks better than 81.76% of 729 companies in the REITs industry. The overall financial strength of Innovative Industrial Properties is 7 out of 10, which indicates that the financial strength of Innovative Industrial Properties is fair.
This is the debt and cash of Innovative Industrial Properties over the past years: 
Profitability and Growth
Investing in profitable companies poses less risk, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Innovative Industrial Properties has been profitable for 5 of the past 10 years. Over the past twelve months, the company had a revenue of $293.90 million and an EPS of $5.65. Its operating margin is 57.43%, which ranks better than 59.8% of 689 companies in the REITs industry. Overall, GuruFocus ranks the profitability of Innovative Industrial Properties at 7 out of 10, which indicates fair profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Innovative Industrial Properties is 33.7%, which ranks better than 94.34% of 636 companies in the REITs industry. The 3-year average EBITDA growth is 33.7%, which ranks better than 86.73% of 535 companies in the REITs industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Innovative Industrial Properties's return on invested capital is 7.07, and its cost of capital is 12.82.
The historical ROIC vs WACC comparison of Innovative Industrial Properties is shown below: 
Conclusion
In summary, the stock of Innovative Industrial Properties (IIPR, Financial) appears to be significantly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 86.73% of 535 companies in the REITs industry. To learn more about Innovative Industrial Properties stock, you can check out its 30-Year Financials here.
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