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Why Is an Earnings Beat Unlikely for HCP (HCP) in Q4?


HCP Inc. HCP is slated to report its fourth-quarter and 2017 results on Feb 13, before the opening bell. Both its revenues and funds from operations (FFO) are expected to experience a decline on year-over-year basis.

Last quarter, this Irvine, CA-based healthcare REIT delivered a positive surprise of 4.35% in terms of FFO per share. Results reflected growth in three-month same-property portfolio cash net operating income (NOI).

The company has a decent surprise history. In fact, over the trailing four quarters, the company exceeded estimates in each occasion, generating an average positive surprise of 4.1%. This is depicted in the graph below.

HCP, Inc. Price and EPS Surprise

HCP, Inc. Price and EPS Surprise | HCP, Inc. Quote

However, HCP’s shares have lost 22.1% of its value over the past six months, underperforming the 8.7% decline recorded by the industry it belongs to.

Let’s see how things are shaping up, prior to this announcement.

Factors to Consider

HCP enjoys a diversified, well-balanced portfolio in the healthcare sector. In the to-be-reported quarter, the company is likely to gain from rising healthcare spending and a growing aging population. Importantly, strategic investments, tie-ups and acquisitions are anticipated to drive decent cash flows.

Subsequently, rental and related revenues are likely to record sequential growth. The Zacks Consensus Estimate of $271 million indicates growth of 1.9% as compared to the prior quarter. However, per the Zacks Consensus Estimate, revenues from life science and medical office will remain stable compared with the prior quarter tally of $90 million and $120 million, respectively.

The company also remains on track with its deleveraging plan and its balance sheet is likely to reflect that. However, as part of such efforts, it significantly disposed of non-core assets. While such moves are a strategic fit for the long term, the company cannot bypass the dilutive impact on earnings in the near term from huge asset dispositions.

Moreover, growth might be hindered by cut-throat competition in HCP’s markets. In addition, there is an increased supply in senior housing category. As this curtails landlords’ pricing power and limits growth in occupancy level, the prevalent oversupply situation is expected to impact the company’s third-quarter numbers.

HCP’s activities during the quarter could not gain adequate analyst confidence. Consequently, the Zacks Consensus Estimate for Q4 FFO has remained constant at 47 cents in a month’s time. Further, it indicates a decline of 20.3% year over year.

The Zacks Consensus Estimate for fourth-quarter revenues is pegged at $456.2 million, indicating a year-over-year drop of 15.5%.

For full-year 2017, the Zacks Consensus Estimate for revenues stands at $1.86 billion, reflecting a year-over-year decrease of 12.7%. The consensus estimate for FFO per share is $1.94, reflecting a year-over-year decline of 29.2%. Management expects core FFO per share in the range of $1.92-$1.96.

Earnings Whispers

Our proven model does not conclusively show that HCP will likely beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. But that is not the case here, as you will see below.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -3.43%.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: HCP has a Zacks Rank #5 (Strong Sell).

Stocks That Warrant a Look

Here are a few stocks in the REIT space that you may want to consider, as our model shows that these have the right combination of elements to come up with a positive surprise this time around:

CubeSmart CUBE is slated to release fourth-quarter results on Feb 15. The stock has an Earnings ESP of +1.10% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

OUTFRONT Media OUT is scheduled to report quarterly numbers on Feb 27. The stock has an Earnings ESP of +0.90% and a Zacks Rank #3.

Extra Space Storage EXR, slated to release quarterly numbers on Feb 20, has an Earnings ESP of +0.23% and a Zacks Rank #3.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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