REIT Stocks

HCP Inc Valuation – January 2019 $HCP

Company Profile (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:

ModernGraham Valuation of HCP – January 2019

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 $14,276,913,709 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.41 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 4.46% Fail
6. Moderate PEmg Ratio PEmg < 20 44.33 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.48 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 1.41 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 40.06 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

EPSmg $0.67
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade D+
MG Value based on 3% Growth $9.73
MG Value based on 0% Growth $5.71
Market Implied Growth Rate 17.91%
Current Price $29.76
% 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 $0.67 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 17.91% 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 $12.24. The company pays a dividend of $1.48 per share, for a yield of 5%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 44.33, which was below the industry average of 70.5, 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 $-14.6.

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) -$14.60
Graham Number $12.24
PEmg 44.33
Current Ratio 1.41
PB Ratio 2.48
Current Dividend $1.48
Dividend Yield 4.97%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2018
Total Current Assets $580,505,000
Total Current Liabilities $410,804,000
Long-Term Debt $6,798,253,000
Total Assets $13,083,958,000
Intangible Assets $305,805,000
Total Liabilities $7,443,583,000
Shares Outstanding (Diluted Average) 470,118,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $0.59
Dec2017 $0.88
Dec2016 $1.34
Dec2015 -$1.21
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.67
Dec2017 $0.82
Dec2016 $0.93
Dec2015 $0.90
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

Recommended Reading:

Other ModernGraham posts about the company

HCP Inc Valuation – March 2018 $HCP
HCP Inc Valuation – January 2016 Update $HCP
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

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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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