Simon Property Group (NYSE:SPG) has been clinging to the recovery narrative for some time now, and it seems like it's starting to pay off. The company was up 0.8% on trading yesterday and added another 1.42% in overnight trading, holding onto its gains into morning trading amid new love from analysts and improving overall market conditions for malls.
A Big New Boost from Jefferies
Simon's recent run of share price successes came mainly from Jefferies, who—by way of analyst Jonathan Petersen—upgraded the company from “hold” to “buy”. A nice jump, but one with some solid motivation behind it; Peterson noted that Simon is trading at a “...2x – 2.5x turn discount to its five-year average on consensus...”, which is a good sign in itself.
Additionally, Petersen pointed out that the company has also worked to reduce bad debt, and has recently driven a lot of investment in retailers of late. This puts Simon in a good position to take advantage of pent-up consumer demand—which is still in place in many places that have only recently allowed malls to reopen—and benefit accordingly.
Just to round it out, Petersen also pointed to the company's “achievable 2021 guidance” and “low 2022 consensus expectations”, which were looking for a gain of 4.8% in year-to-year comparisons. These lower-than-expected targets put Simon on a good track to not only bring out upwardly revised earnings expectations but also multiple expansions from there. Petersen not only upgraded the company's outlook, but also its price target, sending it up from $112 to $130.
Joining the Choir of Changing Sentiment
Petersen's projections were almost certainly welcome, but Petersen is hardly alone on this front. Consensus has been a bit conservative on this one—the current “hold” rating has been in place for over two years now, based on our latest research—but there is a substantial bloc in favor of buying that seems to be expanding.
A year ago—when the coronavirus outbreak was just getting started—the company had a rating of five “buy” ratings, eight “hold” and one “sell”. Six months ago, the company gained a “buy” rating, bringing the total to six “buy”, eight “hold” and one “sell.” Three months ago, fortunes shifted determinedly bearish for Simon as two “buy” jumped ship to “hold”, and a seller stepped in, putting the totals to six “buy”, 10 “hold” and two “sell”. Today, however, there's been some recovery, as we now stand at seven “buy”, nine “hold” and two “sell”.
The average price target is sitting at $100.93, with a high of $135 seen at Morgan Stanley, and a low of $50. However, it's worth noting that three analysts—Jefferies, BMO Capital Markets, and Morgan Stanley—all raised their price targets in the last three days. Plenty of price target hikes have been seen already this year; Piper Sandler upgraded its target back in March from $115 to $130, and Deutsche Bank popped up from $104 to $120 in February along with BTIG Research and Mizuho.
That Ole Recovery Narrative, Backed By Some Decent Numbers
It would be easy to dismiss Simon's recovery as a flight of fancy engendered by the “recovery narrative,” in which people believe that the coronavirus is finally fading away sufficiently that the threat of government-mandated shutdown will die away with it. And to a certain degree, there's some of that involved here. The numbers, however, do support some optimism here; the turn discount against the five-year figure is certainly a valid point, and it also helps that Simon has less bad debt lurking in the background than it did before.
However, Simon's going to have some serious problems to surmount in the near-term. First, it's going to have to address the point of why people would want to go to a Simon mall when they can punch a few buttons on their smartphones and get what they want. This was a problem before the coronavirus and government-mandated shutdowns of retail, but the problem has only worsened since a potential threat to health and safety emerged. Malls were responding to this notion in grand style, looking to focus harder on “experiences” like upscale dining or amusement attractions to go with their shopping. A great idea, but one much harder to maintain with physical stores closed or operating at reduced capacity.
There's no doubt that Simon is recovering. Just being allowed to operate again helped, and that's going to make for some fantastic year-to-year comparisons for the next few months. Simon has some serious issues to address, however, but it's got some time before that becomes a real issue. So for the short term, getting in on Simon may be a good plan. Watch it carefully, though, to see if it can develop a plan to take full advantage of the “recovery narrative” and make its way out of the less-than-perfect macroeconomic structure it's in right now. Simon has made some great moves, purchasing several retailers outright and thus ensuring its malls will never take on the “dead mall” look, but these properties have to produce to have any serious value.
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