Initiating Coverage: Sachem Capital Corp
Sachem Capital Corp. has received a “Buy” rating with a one-year price target of $4.43, indicating a potential 33% increase. This recommendation comes from a comprehensive financial analysis relative to its industry competitors. It considers key financial measures such as revenue and net income growth, levered free cash flow, and various indicators of financial strength and dividend performance.
Although smaller in size, with revenue at $36.46 million versus the industry median of $226.97 million, Sachem Capital Corp. is noted for its impressive growth and profitability. It has achieved a 100% positive revenue growth over the last two years, exceeding the industry average of 92.4%, with a revenue growth rate of 31%, considerably higher than the industry median growth rate of 5%. This indicates the company’s strong ability to generate consistent revenue and expand more rapidly than its competitors. Furthermore, it has maintained a 100% positive net income growth during this period, with net income increasing by 28%, in stark contrast to the industry median, which experienced an 18.3% decrease.
Regarding cash flow, Sachem’s levered free cash flow (LFCF) of $19.40 million is below the industry median of $78.64 million. Nevertheless, it recorded 100% positive LFCF in the last two fiscal years, surpassing the industry average of 91.9%. A 10% decline in LFCF over the past year presents challenges, slightly worse than the industry median decline of 8.80%.
Sachem Capital’s financial stability is underscored by an Altman Z Score of 8.88, far above the industry average of 2.40, indicating a strong financial base and lower risk of distress. However, a shareholder yield of -31.5% points to difficulties in returning value to shareholders despite a stronger balance sheet shown by a debt-to-tangible equity ratio of 160.0%, better than the industry’s 307.6%.
Dividend performance reveals a mixed scenario. A current dividend yield of 12.2% is attractive, but the sustainability of dividends is questioned, with a Dividend Yield / Levered Free Cash Flow (LFCF) Yield of 106.1%, hinting at potential risks. Additionally, a 21.4% decrease in Long-Term Dividend Growth indicates challenges sustaining dividend growth.
The valuation analysis, considering a dividend target based on 45% of the past two years’ LFCF and applying a 15X Dividend Multiple, suggests the stock is currently undervalued. With a price target of $4.43 compared to the current stock price of $3.62, there appears to be an undervalued investment opportunity. This valuation takes into account historical cash flows and a 90% dividend payout, aiming for a target dividend of $0.39 for the next year, with an expected total return of 33%. However, this projected return, which includes both expected stock price appreciation and dividends, is speculative and not guaranteed.
Sachem Capital Corp. stands out for its significant growth, profitability, and financial stability, setting it apart from competitors. Despite facing some challenges in maintaining cash flow and dividend sustainability, its overall performance and potential return on investment support the “Buy” rating. This analysis highlights the need to balance these strengths against the associated risks when considering investment in Sachem Capital Corp.
