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Scotiabank has initiated coverage on Lineage Inc (NASDAQ: LINE) with a Sector Outperform rating and a price target of $95.00. The firm's analysis suggests that Lineage, a company specializing in cold storage and third-party logistics (3PL), has the potential to outperform within its sector.
The price target reflects a valuation of 26.0 times the estimated adjusted funds from operations per share (AFFOPS) for the year 2025.
The investment firm believes that Lineage deserves to trade at a premium compared to the average real estate investment trust (REIT) sector, based on several key factors. Firstly, Lineage's ability to generate a higher return on invested capital (ROIC) is highlighted, with estimates showing approximately 16% acquisition internal rate of return (IRR), compared to around 13% for dry warehouses. This higher ROIC is a strong indicator of the company's profitability and efficiency in using its capital.
In addition to superior ROIC, the management team at Lineage has communicated a growth strategy that is appealing to a broad investor base. This strategy is expected to provide ample opportunity for the company to achieve growth rates above the sector average.
Scotiabank estimates an 11% compound annual growth rate (CAGR) in AFFOPS from 2023 to 2026, with long-term growth projected in the high single digits. This stands in contrast to the REIT sector's expected average growth rate of approximately 6% CAGR from 2023 to 2025.
Despite projecting relatively modest same-store net operating income (SSNOI) growth of about 1% for the year 2024, the firm anticipates that investors will overlook this in favor of the company's broader growth prospects.
Lastly, the analysis points to what is likely to be a trough or near-trough demand period, as indicated by current U.S. Department of Agriculture (USDA) commodity stock levels, which are about 10% below the levels recorded in 2018 and under the 17-year total U.S. food-spend trend. This context suggests that there is potential for demand to increase, which could benefit Lineage's business.
InvestingPro Insights
Scotiabank's optimistic outlook on Lineage Inc (NASDAQ:LINE) is further illuminated by real-time data and insights from InvestingPro. With a substantial market capitalization of $21.17 billion, Lineage stands as a significant player in the Industrial REITs sector, a point underscored by one of the InvestingPro Tips highlighting the company's prominence in the industry. Despite not being profitable over the last twelve months, as indicated by an adjusted P/E ratio of -292.94 and a basic EPS of -1.04 USD, the company's strategic growth initiatives could be a driving force for future performance.
The stock's trading near its 52-week high, at 93.47% of that peak, suggests investor confidence, aligning with Scotiabank's sector outperform rating. However, an InvestingPro Tip cautions that the RSI suggests the stock is currently in overbought territory, which may warrant attention from potential investors. Additionally, the company's price/book ratio stands at 4.35, which is considered high and could suggest that the stock is valued richly relative to its book value.
Investors looking for dividend income may need to look elsewhere, as Lineage does not pay a dividend to shareholders. For those interested in a deeper dive into Lineage's prospects and potential investment considerations, InvestingPro offers a wealth of additional tips, which can be found at: https://www.investing.com/pro/LINE.
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