Another strong performance in today’s afternoon trade has seen the Goodman Group (ASX: GMG) share price edge as high as $16.82, which marks a new record for Australia’s largest real estate investment trust (REIT).
Although its shares have softened slightly, closing the day at $16.59, investors have been piling into this company since it bottomed out at $9.60 earlier in March. So what’s spurring the Goodman share price to new heights and is it too late for prospective investors to jump in?
What’s driving the Goodman share price upward
For the most part, REITs and property shares have been heavily battered this year. This has been in large part due to fears that COVID-19 may profoundly de-value commercial property, as more people substitute the office to work from home.
Goodman appears to be the outlier to this downward trend, shrugging off these concerns principally due to the exposure of its asset portfolio to warehouses and large-scale logistics facilities.
Although it boasts total assets under management of $55 billion across 395 properties globally (as of March 2020), the market appears most impressed by its prospects for growth in the industrial property space with its largest client, e-commerce juggernaut Amazon.com (NASDAQ: AMZN).
On 11 June, it was announced that Goodman had inked a new deal with Amazon for a new 16,300 square metre warehouse in Brisbane. In addition, on 30 June, Goodman entered into a partnership with Brickworks Limited (ASX: BKW) to jointly secure a long-term lease with Amazon at Oakdale West in Sydney.
Amazon’s entrance into the Australian market and the growth of e-commerce more broadly is a significant tailwind for Goodman’s future performance prospects. This US giant and other domestic competitors such as Kogan.com (ASX: KGN) clearly see the importance of bolstering their warehousing capabilities as retail shopping heads online, and Goodman is a key beneficiary by offering such services.
Is it too late to buy in?
If we’re going solely off the ‘buy low, sell high’ mantra, Goodman is probably a watchlist item for many at this point, just because it’s at its most expensive level ever. In support of this view, the company’s price-to-earnings (P/E) ratio of 21 is higher than competitors such as Charter Hall Group (ASX: CHC), with a P/E of 19, and Centuria Industrial REIT (ASX: CIP), with a P/E of 12. This high P/E is undoubtedly due to the future expectations of Goodman’s financial performance being priced in by the market.
Notwithstanding the Goodman share price being somewhat expensive, I still see a lot of upside for prospective investors with a medium- to long-term outlook.
For one thing, the company has managed to maintain both its earnings and distribution guidance for FY20 despite the challenging environment presented by COVID-19. In its Q3 FY20 update to the market in May, Goodman affirmed operating earnings per share of 57.3 cents, equivalent to an 11% increase relative to FY19.
This operational update also revealed the company has $4.8 billion of development work in progress and 97.5% of occupancy rates being maintained. These types of metrics further illustrate the resilience of this business to continue to outperform throughout an otherwise difficult period.
Since that update, the addition of Amazon’s long-term commitment to collaborating with Goodman will certainly have positive ramifications for the company’s FY21 outlook when it reports full-year FY20 earnings on 13 August.
Those investors diving into Goodman at its share price apex may be paying a premium based on its current P/E ratio, but I think this REIT has a tremendous runway for earnings growth potential over the coming years.
E-commerce isn’t going to be slowing down anytime soon, and at the end of the day retailers like Amazon and Kogan are always going to need some immensely large warehouse spaces to fulfil customer demand for goods. I see the Goodman share price continuing to benefit from retail moving online and the unprecedented demand for industrial warehousing this trend facilitates.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Toby Thomas has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool Australia owns shares of and has recommended Brickworks. The Motley Fool Australia has recommended Amazon and Kogan.com ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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