Buy The Digital Realty Dip As Market Overreacts To Data Center Leasing Levels

Achievable Growth Estimates

Analyst Sumit Sharma expects a 13 percent total return, with a 3.9 percent dividend yield and his 8.7 percent 2017–2018 FFO growth estimate. This growth, according to the analyst, is deliverable, given the fact that 88 percent of it from contractual and stable sources. However, the analyst sees negative impact from wholesale rents and forex translation.

5% Upside Likely

Morgan Stanley expects a higher multiple of 16 times, as the market begins to give the company credit for an improved mix of a higher multiple business and the possibility of stock re-rating irrespective of the direction of interest rates. When interest rates go higher, the firm believes the company will benefit from stronger business activity but if interest rates remain low, the company can outperform conventional REITs on higher growth.

Attractive Valuation

Morgan Stanley is of the view that Digital Realty shares are attractively valued relative to its total return expectations of 18 percent, as the company benefits from steady organic growth and a 3.9 percent dividend yield. The company's shares have de-rated from a 19 times FFO multiple to 15 times over the last four months, despite stronger business mixed and geographic footprint, the firm noted.

Accordingly, the firm upgraded the shares of the company to Overweight from Equal Weight, with a price target of $104, up from $103 previously.

At time of writing, Digital Realty Trust was up 1.97 percent at $95.15.