Company ProfileÂ (excerpt from Reuters): HCP, Inc., incorporated on March 21, 1985, is a self-administered real estate investment trust (REIT). The Company invests primarily in real estate serving the healthcare industry in the United States. The Company’s segments include senior housing triple-net (SH NNN), senior housing operating portfolio (SHOP), life science and medical office. As of December 31, 2016, the Company had interests in and managed 15 hospitals, 61 care homes in the United Kingdom and five post-acute/skilled nursing facilities (SNFs). Services provided by its tenants and operators in hospitals are paid for by private sources, third-party payors, such as insurance or through Medicare and Medicaid programs. Its hospital property types include acute care, long-term acute care, specialty and rehabilitation hospitals. Its care homes are registered to provide various levels of services, ranging from personal care to nursing care. SNFs offer restorative, rehabilitative and custodial nursing care for people.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$10,468,260,427||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.22||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|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||2.23%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||34.22||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.97||Pass|
|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||0.22||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-18.64||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-4.25%|
|MG Value based on 3% Growth||$9.44|
|MG Value based on 0% Growth||$5.54|
|Market Implied Growth Rate||12.86%|
|% of Intrinsic Value||N/A|
HCP, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.85 in 2014 to an estimated $0.65 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 12.86% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into HCP, Inc. revealed the company was trading above its Graham Number of $11.6. The company pays a dividend of $1.48 per share, for a yield of 6.6%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 34.22, which was below the industry average of 42.02, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-18.46.
HCP, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D+.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$18.46|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||12/1/2017|
|Total Current Assets||$122,936,000|
|Total Current Liabilities||$546,447,000|
|Shares Outstanding (Diluted Average)||469,256,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$0.53|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$0.65|
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The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.