HCP Inc. (HCP), a health care real estate investment trust (REIT), reported funds from operations of 55 cents per share for the fiscal 2010 second quarter, which exceeded the Zacks Consensus Estimate by a penny. Funds from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
We cover below the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.
Earnings Report Review
HCP reported total revenues of $303.0 million during the quarter, compared with $292.5 million in the year-ago period. Total revenues for the reported quarter were well ahead of the Zacks Consensus Estimate of $281.0 million. For the reported quarter, net operating income (NOI) for the company (excluding straight-line rents and lease termination fees) was $206.5 million, compared with $193.0 million in the year-ago period.
(Read our full coverage on this earnings report: HCP Marginally Beats)
Earnings Estimate Revisions: Overview
Fiscal earnings estimates have climbed for HCP since the earnings release, meaning that analysts are bullish about its long-term performance. Let’s dig into the earnings estimate details.
Agreement of Estimate Revisions
In the last 30 days, earnings estimates for fiscal 2010 were raised by 4 analysts out of 15 covering the stock, while 2 lowered. For fiscal 2011, seven out of 16 analysts covering the stock have revised their estimates upward, while 2 lowered. This indicates a positive directional movement for the fiscal year’s earnings. Management further observed a steady improvement in the operating trends across the senior housing portfolio with high occupancy and positive spreads.
Magnitude of Estimate Revisions
Earnings estimates for fiscal 2010 have increased by a penny to $2.14 in the last 7 days. For fiscal 2011, earnings estimates have increased 2 cents to $2.26. This is encouraging news for the company. In concurrence with the strong quarterly results, management has also revised its outlook to cautiously optimistic.
The long-term earnings estimate picture for HCP is positive. HCP is the leading medical REIT in the US with one of the largest and most diversified portfolios in the sector with exposure to all types of healthcare facilities. The product diversity of the company allows it to capitalize on opportunities in different markets based on individual market dynamics, and provides a hard-to-replicate competitive advantage over its peers.
However, HCP operates in a cutthroat market and competes with national and local healthcare operators on a number of factors, including quality, price and range of services provided; reputation; location; and demographics of the population in the surrounding area; and the financial condition of its tenants and operators. Consequently, the company is under severe stress to maintain profitability.
Currently, we maintain our Neutral rating on HCP with a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1-3 months.