Earnings

Critical Comparison: HCP, Inc. (HCP) vs. Ventas, Inc. (VTR)

HCP, Inc. (NYSE:HCP) shares are down more than -12.38% this year and recently decreased -1.55% or -$0.36 to settle at $22.85. Ventas, Inc. (NYSE:VTR), on the other hand, is down -15.91% year to date as of 02/12/2018. It currently trades at $50.46 and has returned -4.58% during the past week.

HCP, Inc. (NYSE:HCP) and Ventas, Inc. (NYSE:VTR) are the two most active stocks in the REIT – Healthcare Facilities industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect HCP to grow earnings at a 2.50% annual rate over the next 5 years. Comparatively, VTR is expected to grow at a 6.90% annual rate. All else equal, VTR’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 54.28% for Ventas, Inc. (VTR). HCP’s ROI is 4.50% while VTR has a ROI of 4.50%. The interpretation is that HCP’s business generates a higher return on investment than VTR’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. HCP’s free cash flow (“FCF”) per share for the trailing twelve months was +0.02. Comparatively, VTR’s free cash flow per share was -0.07. On a percent-of-sales basis, HCP’s free cash flow was 0.44% while VTR converted -0.72% of its revenues into cash flow. This means that, for a given level of sales, HCP is able to generate more free cash flow for investors.

Financial Risk

HCP’s debt-to-equity ratio is 1.35 versus a D/E of 1.05 for VTR. HCP is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HCP trades at a forward P/E of 30.18, a P/B of 1.94, and a P/S of 6.79, compared to a forward P/E of 26.32, a P/B of 1.65, and a P/S of 5.05 for VTR. HCP is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. HCP is currently priced at a -17.75% to its one-year price target of 27.78. Comparatively, VTR is -18.94% relative to its price target of 62.25. This suggests that VTR is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.80 for HCP and 3.10 for VTR, which implies that analysts are more bullish on the outlook for VTR.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. HCP has a beta of 0.31 and VTR’s beta is 0.20. VTR’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. HCP has a short ratio of 1.93 compared to a short interest of 3.43 for VTR. This implies that the market is currently less bearish on the outlook for HCP.

Summary

Ventas, Inc. (NYSE:VTR) beats HCP, Inc. (NYSE:HCP) on a total of 8 of the 14 factors compared between the two stocks. VTR generates a higher return on investment, is more profitable and has lower financial risk. In terms of valuation, VTR is the cheaper of the two stocks on an earnings, book value and sales basis, VTR is more undervalued relative to its price target. Finally, APLE has better sentiment signals based on short interest.

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