HCP Inc. Quarterly Valuation – July 2014 $HCP

logoREITs 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 specific look at how HCP Inc. (HCP) 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 primarily in real estate serving the healthcare industry in the United States. HCP acquires, develops, leases, manages and disposes of healthcare real estate and provides financing to healthcare providers. The Company’s portfolio consists of investments in the five healthcare segments: senior housing, life science, medical office, post-acute/skilled nursing and hospital. The Company makes investments within its healthcare segments using the five investment products: properties under lease, debt investments, developments and redevelopments, investment management and RIDEA, which represents investments in senior housing operations. In October 2012, Emeritus Corp announced that HCP closed the acquisition of 127 of the 133 senior housing communities. In February 2014, Kindred Healthcare Inc’s subsidiaries completed the acquisition of real estate associated with two nursing centers which it leases from HCP.

HCP Chart

HCP data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $41.44
MG Value $81.65
MG Opinion Undervalued
Value Based on 3% Growth $30.75
Value Based on 0% Growth $18.03
Market Implied Growth Rate 5.52%
Net Current Asset Value (NCAV) -$18.81
PEmg 19.54
Current Ratio 1.39
PB Ratio 1.76

Balance Sheet – 3/31/2013

Current Assets $479,700,000
Current Liabilities $344,100,000
Total Debt $8,450,300,000
Total Assets $19,858,700,000
Intangible Assets $522,400,000
Total Liabilities $9,096,900,000
Outstanding Shares 458,040,000

Earnings Per Share

2014 (estimate) $2.99
2013 $1.97
2012 $1.83
2011 $1.28
2010 $0.93
2009 $0.25
2008 $0.77
2007 $0.67
2006 $0.57
2005 $1.02
2004 $1.03

Earnings Per Share – ModernGraham

2014 (estimate) $2.12
2013 $1.54
2012 $1.22
2011 $0.87
2010 $0.66
2009 $0.57

Dividend History
HCP Dividend Chart

HCP Dividend data by YCharts

Conclusion:

HCP Inc. is a rare REIT which qualifies for the Defensive Investor and thus also the Enterprising Investor.  The Defensive Investor’s only concern at this time is the low current ratio and the Enterprising Investor is willing to overlook concerns regarding the level of debt relative to the current assets because the Defensive Investor is satisfied.  As a result, value 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 undervalued after growing its EPSmg (normalized earnings) from $0.66 in 2010 to an estimated $2.12 for 2014.  This level of demonstrated growth is greater than the market’s implied estimate of 5.52% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the market price.

Be sure to check out ModernGraham’s previous valuations of HCP for greater perspective!

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.

Disclaimer:  The author did not hold a long position in HCP Inc. (HCP) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia or the company website for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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Comments

2 responses to “HCP Inc. Quarterly Valuation – July 2014 $HCP”

  1. Dear Dividend Avatar

    Thanks for the analysis. HCP is near the top of my watchlist this month making your valuation timely for me.

    Regards,
    Dear Dividend

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