The stock of Diversified Healthcare Trust (NAS:DHC, 30-year Financials) gives every indication of being possible value trap, 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 $4.755 per share and the market cap of $1.1 billion, Diversified Healthcare Trust stock gives every indication of being possible value trap. GF Value for Diversified Healthcare Trust is shown in the chart below.
The reason we think that Diversified Healthcare Trust stock might be a value trap is because Diversified Healthcare Trust has an Altman Z-score of 0.04, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.
Link: These companies may deliever higher future returns at reduced risk.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Diversified Healthcare Trust has a cash-to-debt ratio of 0.02, which is worse than 79% of the companies in REITs industry. GuruFocus ranks the overall financial strength of Diversified Healthcare Trust at 3 out of 10, which indicates that the financial strength of Diversified Healthcare Trust is poor. This is the debt and cash of Diversified Healthcare Trust 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. Diversified Healthcare Trust has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $1.6 billion and loss of $0.59 a share. Its operating margin of 5.82% worse than 88% of the companies in REITs industry. Overall, GuruFocus ranks Diversified Healthcare Trust's profitability as fair. This is the revenue and net income of Diversified Healthcare Trust over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Diversified Healthcare Trust is 14.9%, which ranks better than 90% of the companies in REITs industry. The 3-year average EBITDA growth rate is -17.1%, which ranks worse than 77% of the companies in REITs industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Diversified Healthcare Trust's ROIC is 1.45 while its WACC came in at 6.94. The historical ROIC vs WACC comparison of Diversified Healthcare Trust is shown below:
In conclusion, The stock of Diversified Healthcare Trust (NAS:DHC, 30-year Financials) shows every sign of being possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 77% of the companies in REITs industry. To learn more about Diversified Healthcare Trust stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
