Welltower Inc. (NYSE:HCN) and Ventas, Inc. (NYSE:VTR) are the two most active stocks in the REIT – Healthcare Facilities industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect HCN to grow earnings at a 2.90% 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
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Welltower Inc. (HCN) has an EBITDA margin of 46.98%, compared to an EBITDA margin of 54.13% for Ventas, Inc. (VTR). This suggests that VTR underlying business is more profitable. HCN’s ROI is 4.80% while VTR has a ROI of 4.50%. The interpretation is that HCN’s business generates a higher return on investment than VTR’s.
If there’s one thing investors care more about than earnings, it’s cash flow. HCN’s free cash flow (“FCF”) per share for the trailing twelve months was +0.05. Comparatively, VTR’s free cash flow per share was +0.22. On a percent-of-sales basis, HCN’s free cash flow was 0.43% while VTR converted 2.28% of its revenues into cash flow. This means that, for a given level of sales, VTR is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. HCN’s debt-to-equity ratio is 0.81 versus a D/E of 1.13 for VTR. VTR is therefore the more solvent of the two companies, and has lower financial risk.
HCN trades at a forward P/E of 35.87, a P/B of 1.78, and a P/S of 5.93, compared to a forward P/E of 33.57, a P/B of 2.13, and a P/S of 6.43 for VTR. 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. HCN is currently priced at a -6.41% to its one-year price target of $73.21. Comparatively, VTR is -3.62% relative to its price target of $65.69. This suggests that HCN 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 2.90 for HCN and 3.20 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. HCN has a beta of 0.24 and VTR’s beta is 0.14. VTR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. HCN has a short ratio of 7.85 compared to a short interest of 6.40 for VTR. This implies that the market is currently less bearish on the outlook for VTR.
Ventas, Inc. (NYSE:VTR) beats Welltower Inc. (NYSE:HCN) on a total of 7 of the 13 factors compared between the two stocks. VTR generates a higher return on investment, is more profitable, has higher cash flow per share and has a higher cash conversion rate. Finally, VTR has better sentiment signals based on short interest.