Earnings

Critical Comparison: Welltower Inc. (HCN) vs. Ventas, Inc. (VTR)

Welltower Inc. (NYSE:HCN) shares are up more than 2.08% this year and recently increased 0.29% or $0.2 to settle at $68.32. Ventas, Inc. (NYSE:VTR), on the other hand, is up 4.59% year to date as of 11/10/2017. It currently trades at $65.39 and has returned 2.03% during the past week.

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. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. 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

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 54.28% for Ventas, Inc. (VTR). 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.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. HCN’s free cash flow (“FCF”) per share for the trailing twelve months was -0.32. Comparatively, VTR’s free cash flow per share was -0.07. On a percent-of-sales basis, HCN’s free cash flow was -2.77% while VTR converted -0.72% 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.

Financial Risk

HCN’s debt-to-equity ratio is 0.82 versus a D/E of 1.05 for VTR. VTR is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HCN trades at a forward P/E of 35.73, a P/B of 1.80, and a P/S of 5.89, compared to a forward P/E of 33.92, a P/B of 2.13, and a P/S of 6.54 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

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”. HCN is currently priced at a -6% to its one-year price target of 72.68. Comparatively, VTR is -0.17% relative to its price target of 65.50. 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 2.80 for HCN and 3.10 for VTR, which implies that analysts are more bullish on the outlook for VTR.

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. HCN has a beta of 0.24 and VTR’s beta is 0.13. VTR’s shares are therefore the less volatile of the two stocks.

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.HCN has a short ratio of 6.58 compared to a short interest of 3.61 for VTR. This implies that the market is currently less bearish on the outlook for VTR.

Summary

Ventas, Inc. (NYSE:VTR) beats Welltower Inc. (NYSE:HCN) on a total of 7 of the 14 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.

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