Not many things in life rise in value by nearly 70% over just 12 months. So I am pleased that one of the stocks I own has done just that. Does such a strong performance reflect a great business model that could lead to even bigger increases in the price of the FTSE 250 share? Or could it mean that the share price has now moved beyond a level where I see value in adding more to my portfolio?
Self-storage operator
The share in question is self-storage company Safestore (LSE: SAFE).
Why have the shares been doing so well? Basically I think it is a reflection of positive investor sentiment towards the business model and outlook for the company. Like serviced offices, the self-storage business model basically involves buying or renting a property then subletting it in much smaller parts on fairly short leases. But whereas a serviced office is used regularly by workers who may want it to be pleasant and inviting, self-storage facilities are functional. They do not need to look pretty or be centrally located.
That means costs can be kept low, helping profits. Meanwhile, the effort of moving things means that when people hire storage units they often end up keeping them for years. In its first quarter results last month, the company reported revenue that was 15% higher than a year before. The average storage rate had increased 12% in the period, meaning that even with the same space the company should be able to boost revenues.
The company has passed on some of its success to sharholders. The dividend per share rose 35% last year, meaning the shares now yield 1.9%. That huge dividend increase has helped push the share price up.
Where next for the Safestore share price?
Even after the rise, Safestore shares trade on a price-to-diluted earnings ratio of less than eight. That may make them sound cheap, although earnings per share calculations in property companies can be complicated.
I do think the shares continue to offer me value, however. Revenues, profits, and dividends look set to keep growing in coming years. The company’s installed customer base, network of branches and strong brand all help it commercially. If it can keep growing the way it has been doing, I believe this FTSE 250 share could indeed see more growth in its price.
A FTSE 250 share for my portfolio
But there are risks, too. The company’s European expansion plans could stretch management capabilities. If Safestore makes a misstep on the Continent, it could be hit with unanticipated costs.
I also think the industry has low barriers to entry. A big US operator trying to move aggressively into Europe could hurt profit margins for companies including Safestore, for example.
However, I am impressed by Safestore’s historical growth rates and reckon it has a successful formula. I am hoping it may deliver further share price growth in coming years, as well as potentially meaty dividend increases. I own it in my portfolio and would consider buying more shares, even after the strong price rise in the past year.
