Initiating Coverage: NETSTREIT Corp.

NETSTREIT Corp. has received a “Sell” rating with a one-year price target of $14.91, suggesting a potential decrease of -11%. This recommendation stems from a detailed analysis of the company’s financial performance, including its income statement, cash flow statement, balance sheet, ability to sustain dividends, and stock valuation. Despite certain areas where the company outperforms, issues related to its financial health, the returns it provides to shareholders, and its stock price have led to this negative outlook.

The company has seen its revenue and net income grow faster than many in its industry, with last twelve months (LTM) revenue reaching $131.36 million and net income increasing by 109%, well above the industry’s median. This indicates that NETSTREIT Corp. can increase its sales and profits quicker than many of its competitors. However, its revenue falls short of the industry median of $226.97 million, suggesting it might be smaller in scale compared to other companies in the sector.

NETSTREIT Corp.’s levered free cash flow (LFCF) for the LTM stands at $80.12 million, slightly above the average competitor, indicating a competitive advantage in generating cash after financing costs. The company has also consistently reported positive LFCF over the past two years and has seen a 62% growth in LFCF, surpassing industry standards. These figures point to the company’s stable and growing cash flow.

The balance sheet analysis reveals both strengths and weaknesses. With an Altman Z Score of 1.35, there’s a heightened risk of financial distress compared to others in the industry. The negative shareholder yield of -26.7% and a buyback yield of -21.6% indicate the company’s underperformance in providing shareholder value. A lower Debt-to-Tangible Equity Ratio of 56.0% suggests a relatively healthy balance sheet with lesser dependence on debt.

When it comes to dividends, the company offers a yield of 4.7%, which is below the index average. However, the dividend sustainability ratio suggests that NETSTREIT Corp.’s dividends are more sustainable than those of many peers, with a 2.5% growth in dividends over the past year, showing a dedication to shareholder value despite the lower yield.

The valuation analysis, using a 15X Dividend Multiple and considering the dividend’s stability, results in a valuation of $14.91, under the current market price of $17.56. This suggests that the stock may be overvalued, leading to the sell recommendation.

While NETSTREIT Corp. demonstrates financial strengths in certain areas, the overarching concerns regarding its financial stability, shareholder returns, and stock valuation suggest caution. The company’s notable revenue and net income growth, along with its strong cash flow, are positive aspects. However, the significant risk of financial distress, inadequate shareholder yields, and the stock’s potential overvaluation indicate substantial investment risks. The forecast of a -11% return, factoring in both the expected stock price drop and dividend payments, advises a cautious stance for investors, highlighting the need for a comprehensive assessment of financial health, operational efficiency, and market valuation in making investment decisions.