Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. 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 company or by reviewing the 5 Undervalued Companies for the Defensive Investor. 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 Ventas Inc. (VTR) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Ventas, Inc. is a real estate investment trust (REIT) with a geographically diverse portfolio of seniors housing and healthcare properties throughout the United States and Canada. As of December 31, 2011, the Company operated through three business segments: triple-net leased properties, senior living operations and MOB operations. As of December 31, 2011, the Company owned 1,378 properties located in 46 states, the District of Columbia and two Canadian provinces, consisting of 678 seniors housing communities; 396 skilled nursing facilities; 47 hospitals; 249 medical office buildings (MOBs), and eight personal care facilities. The Company was in the process of developing three properties as of December 31, 2011. In July 2011, it acquired Nationwide Health Properties, Inc. (NHP). In June 2012, the Company sold 12 seniors housing communities to Assisted Living Concepts, Inc. In June 2014, the Company acquired ARC Healthcare.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$34.83|
|Value Based on 0% Growth||$20.42|
|Market Implied Growth Rate||9.22%|
|Net Current Asset Value (NCAV)||-$36.05|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Ventas does not qualify for the Defensive Investor or the Enterprising Investor. The Defensive Investor has issues with the low current ratio and the high PEmg ratio. The Enterprising Investor is concerned with the high level of debt relative to the net current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities. As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.30 in 2010 to an estimated $2.40 in 2014. This level of demonstrated growth supports the market’s implied estimate of 9.22% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to 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 Ventas Inc. (VTR)? 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 position in Ventas Inc. (VTR) or in any other company mentioned in this 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.