Real Estate Stock Signals a Boom in Manufacturing Activity

Key Points

• Prologis stock just released its second quarter 2024 earnings report, and investors now have a new insight into the state of U.S. industrial stocks.
• With other companies surrounding the sector, one bet on September's coming interest rate cuts.
• Investors can get in early before the industrial wave by taking advantage of Prologis stock's discount.

Most investors have been trying to squeeze the last leg in the technology sector rally, risking getting caught in the top of artificial intelligence names like NVIDIA Co. NASDAQ: NVDA, which is now rejecting a new all-time high as news hit the market that the U.S. will increase technology bans and embargoes further against China, which will hurt semiconductor stocks.

Diversifying away from these risks will require investors to look not at the rear-view mirror but at the road ahead. Gold prices are now making a new all-time high, a rally not seen since the inflationary environment of the 1970s, and that means something for the U.S. dollar. Since central banks and other institutions can buy dollars to keep them strong, the dollar index doesn’t really reflect the economic reality of today.

But, earnings coming out of Prologis Inc. NYSE: PLD tell investors a different story, the same story that gold prices are trying to tell. The conclusion: Logistics and real estate stock will be in the eye of the storm as a potential boom in the manufacturing sector takes place. So, to diversify away from the potential technological pullbacks, here’s how investors can look at Prologis stock and beyond.

This Year’s Prologis Activity Forecast: Key Insights

As of right now, Wall Street analysts' consensus price targets on Prologis stock are $129.9 a share, or roughly 7% above the current price. However, investors should consider the following drivers to determine whether analysts will need to upgrade their views in the following quarters.

According to a Cushman & Wakefield NYSE: CWK report, the U.S. industrial market has recently lost momentum. However, there have been signs of a recovery in the second quarter, with rental rates for industrial property beginning to recover and vacancy rates improving.

Despite these improvements, the demand side of the equation wasn’t enough to warrant new development to increase the availability of new industrial property. Investors can see this trend in Prologis’ second quarter 2024 earnings press release.

Rental revenues rose to $1.8 billion, up from $1.6 billion a year prior, roughly a 12.2% increase in the past 12 months. On the other hand, strategic capital (tied to new development) revenues declined to $154.7 million from $799 million a year prior.

While the current state of the industrial sector in the U.S. doesn’t look like it’s in the best state, investors can look to Prologis management’s guidance to understand what might be coming in the following quarters. An earnings per share (EPS) guidance for $3.15 to $3.35 a share last is now pushed to a range of $3.25 to $3.45.

On seeing this new guidance, Wall Street analysts forecast up to 11.8% earnings per share (EPS) growth in the next 12 months. Analyst forecasts should be taken with a grain of salt, so here’s how investors can justify them by looking at the macro picture.

Prologis Positioned for Success with Support from Industry Movers

Recently, shares of RXO Inc. NYSE: RXO have rallied by over 50% on news of a new acquisition within the logistics industry. This move could capitalize on bullish trends that could be heading to the space in the future.

But how will the industry be supported now that the ISM manufacturing PMI index has been contracting for nearly 20 consecutive months? It has everything to do with the state of the U.S. dollar today.

Gold prices broke to an all-time high, a proxy for the market's sentiment toward the dollar, betting that the currency will be devalued soon. According to the CME's FedWatch tool, there's a 90% probability of interest rate cuts coming by September 2024, and with lower rates comes a lower currency.

With a lower dollar, U.S. exports will become more attractive to foreign buyers, as foreign currency will go a long way when buying American goods. Also, lower rates could spike mortgage and housing demand and consumer spending.

This is all good for Prologis, as some of its top tenants include Amazon.com Inc. NASDAQ: AMZN, Home Depot Inc. NYSE: HD, and FedEx Co. NYSE: FDX. As consumer discretionary activity sees a boost on lower rates, Amazon warehouses could seek to expand and sign with Prologis, and so will Home Depot on the new home improvement products demand.

Why Prologis May Be a Strong Buy for Investors

Considering these trends, investors could expect to see Prologis recover on a valuation basis, which is where today's discounts make it a more attractive stock. On a price-to-book (P/B) basis, Prologis stock trades at a 1.9x multiple, which offers a discount of 25% compared to the real estate investment trust (REITs) industry's 2.5x average multiple.

Price action would offer a different stance to this discount, which can be considered as a leading indicator for what could come for the stock. Prologis stock now trades at 92% of its 52-week high price, which could fit the definition of the stock being in a bull market of its own.