HCP, Inc. (NYSE:HCP) and Physicians Realty Trust (NYSE:DOC) 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.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect HCP to grow earnings at a 2.50% annual rate over the next 5 years. Comparatively, DOC is expected to grow at a 9.70% annual rate. All else equal, DOC’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. HCP, Inc. (HCP) has an EBITDA margin of 35.92%, compared to an EBITDA margin of 47.89% for Physicians Realty Trust (DOC). This suggests that DOC underlying business is more profitable. HCP’s ROI is 4.50% while DOC has a ROI of 1.20%. The interpretation is that HCP’s business generates a higher return on investment than DOC’s.
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 +0.08. Comparatively, DOC’s free cash flow per share was +0.09. On a percent-of-sales basis, HCP’s free cash flow was 1.76% while DOC converted 0.01% 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.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. HCP’s debt-to-equity ratio is 1.31 versus a D/E of 0.67 for DOC. HCP is therefore the more solvent of the two companies, and has lower financial risk.
HCP trades at a forward P/E of 38.12, a P/B of 2.23, and a P/S of 7.17, compared to a forward P/E of 51.95, a P/B of 1.32, and a P/S of 10.66 for DOC. 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. HCP is currently priced at a -12.17% to its one-year price target of $30.90. Comparatively, DOC is -13.63% relative to its price target of $20.39. This suggests that DOC 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 3.00 for HCP and 2.10 for DOC, which implies that analysts are more bullish on the outlook for HCP.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. HCP has a beta of 0.37 and DOC’s beta is 0.56. HCP’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. HCP has a short ratio of 3.53 compared to a short interest of 2.53 for DOC. This implies that the market is currently less bearish on the outlook for DOC.
Physicians Realty Trust (NYSE:DOC) beats HCP, Inc. (NYSE:HCP) on a total of 8 of the 13 factors compared between the two stocks. DOC generates a higher return on investment, is more profitable, has higher cash flow per share and has lower financial risk. DOC is more undervalued relative to its price target. Finally, DOC has better sentiment signals based on short interest.