Earnings Preview: Prologis

Prologis Inc. (PLD - Analyst Report), one of the leading global providers of distribution facilities, is scheduled to report its 2012 second quarter earnings on July 26. The current Zacks Consensus Estimate for the second quarter is 42 cents per share, representing a year-over-year growth of about 19.6%.

First Quarter Recap

Prologis had reported first quarter 2012 funds from operations (FFO) of $184.8 million or 40 cents per share compared with $74.4 million or 29 cents in the year-earlier quarter. Funds from operations, a widely used metric to gauge the performance of real estate investment trusts (REITs), are obtained after adding depreciation and other non-cash expenses to net income.

The reported FFO for first quarter 2012 was in line with the Zacks Consensus Estimate. Excluding non-recurring items, FFO for the reported quarter was $262.1 million or 56 cents per share compared with $62.1 million or 24 cents in the year-ago quarter.

Total revenues during the reported quarter were $500.1 million compared with $229.9 million in the year-ago quarter. Total reported revenues were well ahead of the Zacks Consensus Estimate of $452 million.

Agreement of Analysts

In the last seven days, there has been no earnings estimate revision for the second quarter and full year 2012 as analysts, in general, have been circumspect about the future outlook of the company. In the last 30 days, one of the 13 analysts covering the stock had revised the earnings estimate down for both the second quarter and full year 2012.

For 2013, two out of 12 analysts covering the stock had reduced the earnings estimates in the last 30 days, while none had increased them. From a macro aspect, this implies that the analysts are a tad bearish about the performance of the company.

Magnitude of Estimate Revisions

Earnings estimates have remained static in the last 30 days for both the second quarter and full year 2012 at 42 cents and $1.67 per share, respectively, meaning that analysts were overtly cautious about the long-term prospects of the company. For full year 2013, the earnings estimate has also remained steady at $1.77 during the same time period.

Neutral on Prologis

We currently have a Neutral recommendation on Prologis, which presently has a Zacks #3 Rank that translates into a short-term Hold rating. However, we have an Outperform recommendation and a Zacks #2 Rank (short-term ‘Buy’ rating) for Winthrop Realty Trust (FUR - Snapshot Report), one of the peers of Prologis.

Our long-term Neutral recommendation on Prologis is based on the belief that it has considerably reduced operating risks through continued lease-up of its development portfolio. Prologis also has a geographically diverse portfolio of distribution facilities that integrate international scope and expertise with a strong local presence in its markets, which provides a strong upside potential for the company. Furthermore, the properties are located in large, supply-constrained infill markets at close proximity to airports, seaports, and ground transportation facilities, which enable rapid distribution of customers’ products. This has enabled the company to gain a significant pricing advantage over its competitors.

However, given its international presence, Prologis often faces unfavorable foreign currency movements and other economic fluctuations that impair its top-line growth. In addition, the company faces significant competition from other REITs and private institutional funds. This puts considerable pressure on the company to dispose its illiquid assets and reduce operating costs, thereby undermining its long-term growth potential.