CareTrust REIT, Inc. (NASDAQ:CTRE) and LTC Properties, Inc. (NYSE:LTC) are the two most active stocks in the REIT – Healthcare Facilities industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
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 CTRE to grow earnings at a 30.30% annual rate over the next 5 years. Comparatively, LTC is expected to grow at a 4.00% annual rate. All else equal, CTRE’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 as measures of profitability. CareTrust REIT, Inc. (CTRE) has an EBITDA margin of 76.76%, compared to an EBITDA margin of 87.24% for LTC Properties, Inc. (LTC). This suggests that LTC underlying business is more profitable.
Cash is king when it comes to investing. CTRE’s free cash flow (“FCF”) per share for the trailing twelve months was +0.15. Comparatively, LTC’s free cash flow per share was +0.05. On a percent-of-sales basis, CTRE’s free cash flow was 0.01% while LTC converted 0% of its revenues into cash flow. This means that, for a given level of sales, CTRE is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. CTRE’s debt-to-equity ratio is 0.65 versus a D/E of 0.85 for LTC. LTC is therefore the more solvent of the two companies, and has lower financial risk.
CTRE trades at a forward P/E of 25.40, a P/B of 2.21, and a P/S of 11.77, compared to a forward P/E of 21.29, a P/B of 2.46, and a P/S of 11.57 for LTC. CTRE is the cheaper of the two stocks on book value basis but is expensive in terms of P/E and P/S ratio. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. CTRE is currently priced at a -1.81% to its one-year price target of $18.83. Comparatively, LTC is -7.09% relative to its price target of $50.94. This suggests that LTC 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 2.40 for CTRE and 2.70 for LTC, which implies that analysts are more bullish on the outlook for LTC.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. LTC’s beta is 0.19.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. CTRE has a short ratio of 4.64 compared to a short interest of 5.04 for LTC. This implies that the market is currently less bearish on the outlook for CTRE.
CareTrust REIT, Inc. (NASDAQ:CTRE) beats LTC Properties, Inc. (NYSE:LTC) on a total of 7 of the 11 factors compared between the two stocks. CTRE is growing fastly, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. Finally, CTRE has better sentiment signals based on short interest.