DuPont Fabros: Things Aren't As Bad As They Seem

Not All That Bad

The stock has dropped 20 percent since June 30, discounting an expectation of weaker third-quarter leasing activity versus first half 2016 peak levels.

"[W]e believe the market's short-term focus on 3Q bookings fails to account for the strong backlog growth that has occurred this year on the heels of record YTD leasing activity for DFT, which provides a high degree of visibility toward double-digit 2017 AFFO growth," analyst Matthew Heinz wrote in a note.

Related Link: DuPont Fabros Tech Announces Successful Achievement Of Its Sales Tax Exemption Performance Targets

Further, Heinz noted that DuPont Fabros' recent preferred stock redemption/refi transactions are $0.15 accretive to annualized FFO/AFFO per share beginning third quarter of 2016.

Additional Catalysts

In addition, the company would benefit from favorable organic growth outlook in new/existing markets, DuPont Fabros is also set to capitalize on the next wave of U.S. hyperscale activity (Oracle Corporation ORCL, Alphabet Inc GOOG GOOGL's Google and Alibaba Group Holding Ltd BABA) which Heinz expects to ramp up in late 2016/early 2017.

Importantly, DuPont Fabros has limited near-term renewal risk, with only four leases set to expire from now through the fourth quarter of 2017, totaling less than 2 percent of ABR.

However, the analyst cut the price target to $43 from $45 and expects F16/F17 FFO of $2.78/$3.15.

That said, Heinz sees 18 percent total return potential to his $43 target price, based on 13.5x his 2017 AFFO estimate.

At time of writing, DuPont Fabros rose 3.39 percent to $39.30.

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