ModernGraham Quarterly Valuation Of HCP

Apr.16.14 | About: HCP, Inc. (HCP)

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Defensive Investor. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how HCP Inc. (NYSE:HCP) fares in the ModernGraham valuation model.

HCP Chart

HCP data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $40.53
MG Value $59.34
MG Opinion Undervalued
Value Based on 3% Growth $22.35
Value Based on 0% Growth $13.10
Market Implied Growth Rate 8.90%
Net Current Asset Value (NCAV) -$18.87
PEmg 26.30
Current Ratio 1.90
PB Ratio 1.73
Click to enlarge

Balance Sheet - 12/31/2013

Current Assets $731,300,000
Current Liabilities $384,300,000
Total Debt $8,661,600,000
Total Assets $20,075,900,000
Intangible Assets $489,800,000
Total Liabilities $9,352,600,000
Outstanding Shares 456,960,000
Click to enlarge

Earnings Per Share

2013 $1.97
2012 $1.83
2011 $1.28
2010 $0.93
2009 $0.25
2008 $0.77
2007 $0.67
2006 $0.57
2005 $1.02
2004 $1.03
Click to enlarge

Earnings Per Share - ModernGraham

2013 $1.54
2012 $1.22
2011 $0.87
2010 $0.66
2009 $0.57
2008 $0.75
Click to enlarge

Dividend History

HCP Dividend Chart

HCP Dividend data by YCharts

Conclusion:

HCP Inc. for now qualifies for the Enterprising Investor, which is a rather rare achievement for a REIT as normally the level of debt present eliminates them from contention. In this case, though, the company's current assets are high enough this quarter to push it into contention for investment. For the Defensive Investor, the company's PEmg ratio is too high and the current ratio is not high enough to overcome that burden. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of a Glance at the Dow and 5 Low PEmg Companies for the Defensive Investor. From a valuation standpoint, the company appears to be undervalued, having grown its EPSmg (normalized earnings) from $0.57 in 2009 to $1.54 for 2013. This demonstrated level of growth is above the market's implied estimate of 8.9% earnings growth, and the ModernGraham valuation model has returned an estimate of intrinsic value that is higher than the market price.

Disclaimer: The author did not hold a position in HCP Inc. (HCP) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.