Top Picks 2020: Equinix (EQIX)

01/14/2020 5:00 am EST

Focus: REITS

Jacob Kilstein

Associate Analyst, Argus Research Company

Argus Research analyst Jacob Kilstein selected CMS Energy (CMS) as his Top Pick last year. He continues to rate the stock — which rose 26% last year — as a "buy" based on strong growth in earnings and dividends. For 2020, his top idea is a REIT.

Equinix Inc. (EQIX) is a real estate investment trust (REIT) that operates global interconnection and data centers. It is focused on helping customers develop secure networks and cloud-neutral data center platforms.

The company is leveraged to the secular transition away from on-premises data centers to cloud colocation centers. Its global platform for digital business serves customers in more than 50 major markets on five continents.

We believe that Equinix, which operates facilities that enable global interconnection, data integration and information management, has strong opportunities in the global colocation market, and note that the company has grown both organically and through targeted acquisitions.

Equinix pays a quarterly dividend of $2.46 per share, or $9.84 annually, for a yield of about 1.8%. Concurrent with earnings, the board declared a quarterly dividend of $2.46 per share.

Over the past five years, the board has raised the dividend at an average annual rate of 7.8%. Our dividend estimates are $9.84 for 2019 and $10.56 for 2020.

We believe that the shares remain undervalued at current levels given the company's strong growth prospects. The shares trade at 23.7-times our 2020 AFFO estimate, compared to a peer average of 19.9.

On other metrics, however, EQIX trades closer to the peer average despite what we view as its superior growth prospects. The price/sales ratio is 8.5, compared to a peer average of 7.4, and the EV/EBITDA multiple is 20.2, just above the peer average of 19.9.

We are maintaining our price target at $630, as we see EQIX as the data center REIT best positioned to take advantage of current industry growth trends, and warranting a higher price/AFFO multiple than its peers.

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