Why Tanger’s latest acquisition matters for shareholders

Tanger (SKT) has drawn fresh attention after buying The Town Center at Levis Commons in Ohio, a 300,000 square foot open air lifestyle center acquired for about US$60 million using existing liquidity.

The deal adds a fourth full price lifestyle center to Tanger’s portfolio and comes as funds from operations expectations point to potential strength, even as recent estimate revisions inject some caution into the upbeat trading reaction.

The acquisition headlines have arrived alongside strong recent momentum, with a 7 day share price return of 11.08% and a 1 year total shareholder return of 35.23%. Multi year total shareholder returns above 100% suggest that longer term holders have already seen substantial gains.

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With Tanger trading close to its recent analyst price target and showing strong multi year total returns, the key question now is whether Levis Commons adds hidden value for patient shareholders or if the market is already pricing in future growth.

Price-to-Earnings of 37x: Is it justified?

At a last close of $39.60, Tanger trades on a P/E of 37x, which the data suggests is expensive compared to both its own fair ratio and the wider Retail REITs industry.

The P/E multiple compares the current share price to earnings per share, so a higher ratio often means investors are willing to pay more today for each dollar of earnings. For a REIT like Tanger, which already reports high quality earnings and a net profit margin of 20.1%, a 37x P/E implies the market is placing a premium on its profit profile rather than treating it as a purely income focused vehicle.

There is a tension in the numbers. Tanger is considered good value versus direct peers on a P/E basis, with its 37x multiple below the peer average of 41.6x. However, the same 37x is described as expensive versus the broader US Retail REITs industry average of 27.3x. In addition, the estimated fair P/E ratio of 36x points to a level the market could move towards if sentiment or growth expectations cool from here.

Result: Price-to-Earnings of 37x (OVERVALUED)

However, there are clear risks, including the rich 37x P/E compared with industry levels and the possibility that analyst expectations or sentiment toward outlet retail cools.

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Another view via our DCF model

The SWS DCF model points in the same direction as the P/E work. Tanger is trading at $39.60 compared with an estimated future cash flow value of $37.05. That suggests the stock is priced above this cash flow based estimate, so how comfortable are you paying a premium for this story?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Tanger for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 47 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

With mixed signals on valuation and sentiment, do you feel the story skews more toward opportunity or risk, and are you ready to act quickly by weighing the 2 key rewards and 3 important warning signs?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.