REIT Stocks

HCP Inc Valuation – January 2016 Update $HCP

REITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors.  This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward.  Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another investment opportunity.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Macerich Co (MAC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): HCP, Inc. (HCP) is a real estate investment trust (REIT). The Company invests in real estate serving the healthcare industry in the United States. Its portfolio consists of investments in various healthcare segments: senior housing, post-acute/skilled nursing, life science, medical office and hospital. Its portfolio includes owned portfolio, unconsolidated joint ventures, and developments and redevelopments. Its owned portfolio includes around 1,040 properties under lease and 68 operating properties. It has interests in unconsolidated joint ventures representing around 88 properties in its senior housing, life science and medical office segments. It has assets under development, redevelopment and land held for future development in life science and medical office segments. The properties owned by it in medical office and senior housing segments, which are under development or redevelopment include Pacific Corporate Park, Memorial Hermann, Sky Ridge, Bayfront, Folsom and Deer Park.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of HCP

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $16,276,479,982 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.95 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -30.45% Fail
6. Moderate PEmg Ratio PEmg < 20 22.72 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.64 Pass
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.95 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 22.87 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

HCP value chart January 2016

EPSmg $1.58
MG Growth Estimate 4.84%
MG Value $28.76
Opinion Overvalued
MG Value based on 3% Growth $22.94
MG Value based on 0% Growth $13.45
Market Implied Growth Rate 7.11%
Current Price $35.94
% of Intrinsic Value 124.95%

HCP Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, the insufficient earnings growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.20 in 2011 to an estimated $1.58 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 7.11% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on HCP Inc (HCP)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

HCP charts January 2016

Net Current Asset Value (NCAV) -$23.78
Graham Number $20.46
PEmg 22.72
Current Ratio 1.95
PB Ratio 1.64
Dividend Yield 6.23%
Number of Consecutive Years of Dividend Growth 11

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Sep2015
Total Current Assets $1,001,794,000
Total Current Liabilities $514,403,000
Long-Term Debt $11,144,880,000
Total Assets $22,192,973,000
Intangible Assets $610,023,000
Total Liabilities $12,025,221,000
Shares Outstanding (Diluted Average) 463,586,000

Earnings Per Share History

Next Fiscal Year Estimate $0.85
Dec2014 $2.00
Dec2013 $2.13
Dec2012 $1.90
Dec2011 $1.29
Dec2010 $1.00
Dec2009 $0.40
Dec2008 $1.79
Dec2007 $2.71
Dec2006 $2.66
Dec2005 $1.12
Dec2004 $1.11
Dec2003 $0.97
Dec2002 $0.96
Dec2001 $0.85
Dec2000 $1.07
Dec1999 $1.13
Dec1998 $1.27
Dec1997 $1.10
Dec1996 $1.06

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.58
Dec2014 $1.85
Dec2013 $1.63
Dec2012 $1.35
Dec2011 $1.20
Dec2010 $1.34
Dec2009 $1.58
Dec2008 $2.07
Dec2007 $2.05
Dec2006 $1.60
Dec2005 $1.05
Dec2004 $1.01
Dec2003 $0.97
Dec2002 $1.00
Dec2001 $1.04
Dec2000 $1.13
Dec1999 $1.07

Recommended Reading:

Other ModernGraham posts about the company

13 Best Stocks For Value Investors This Week – 10/17/15
HCP Inc. Valuation – October 2015 Update $HCP
18 Companies in the Spotlight This Week – 10/25/14
HCP Inc. Annual Stock Valuation – 2014 $HCP
5 Undervalued Companies to Research With a Low Beta – October 2014

Other ModernGraham posts about related companies

Macerich Co Valuation – January 2016 Update $MAC
American Tower Corp Valuation – November 2015 Update $AMT
Weyerhaeuser Co Valuation – November 2015 Update $WY
Boston Properties Inc. Valuation – November 2015 Update $BXP
Welltower Inc. Valuation – November 2015 Update $HCN
Kimco Realty Corporation Valuation – November 2015 Update $KIM
Prologis Inc. Valuation – October 2015 Update $PLD
HCP Inc. Valuation – October 2015 Update $HCP
Essex Property Trust Inc. Analysis – October 2015 Update $ESS
Macerich Company Analysis – September 2015 Update $MAC

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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