– By GF Value
The stock of Omega Healthcare Investors (NYSE:OHI, 30-year Financials) gives every indication of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $37.89 per share and the market cap of $8.8 billion, Omega Healthcare Investors stock gives every indication of being modestly overvalued. GF Value for Omega Healthcare Investors is shown in the chart below.
Because Omega Healthcare Investors is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. Omega Healthcare Investors has a cash-to-debt ratio of 0.03, which ranks worse than 72% of the companies in REITs industry. Based on this, GuruFocus ranks Omega Healthcare Investors’s financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Omega Healthcare Investors over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Omega Healthcare Investors has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $892.4 million and earnings of $0.69 a share. Its operating margin of 50.68% in the middle range of the companies in REITs industry. Overall, GuruFocus ranks Omega Healthcare Investors’s profitability as fair. This is the revenue and net income of Omega Healthcare Investors over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company’s revenue and earnings are declining, the value of the company will decrease. Omega Healthcare Investors’s 3-year average revenue growth rate is worse than 71% of the companies in REITs industry. Omega Healthcare Investors’s 3-year average EBITDA growth rate is 1.9%, which ranks in the middle range of the companies in REITs industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Omega Healthcare Investors’s return on invested capital is 4.73, and its cost of capital is 6.69. The historical ROIC vs WACC comparison of Omega Healthcare Investors is shown below:
In closing, The stock of Omega Healthcare Investors (NYSE:OHI, 30-year Financials) shows every sign of being modestly overvalued. The company’s financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in REITs industry. To learn more about Omega Healthcare Investors stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.