The stock of National Health Investors (NYSE:NHI, 30-year Financials) gives every indication of being fairly valued, 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 $74.05 per share and the market cap of $3.4 billion, National Health Investors stock appears to be fairly valued. GF Value for National Health Investors is shown in the chart below.
Because National Health Investors is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 3.2% over the past five years.
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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. National Health Investors has a cash-to-debt ratio of 0.03, which is worse than 72% of the companies in REITs industry. GuruFocus ranks the overall financial strength of National Health Investors at 4 out of 10, which indicates that the financial strength of National Health Investors is poor. This is the debt and cash of National Health Investors over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. National Health Investors has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $332.8 million and earnings of $4.14 a share. Its operating margin is 67.58%, which ranks better than 80% of the companies in REITs industry. Overall, the profitability of National Health Investors is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of National Health Investors 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of National Health Investors is 3.2%, which ranks better than 67% of the companies in REITs industry. The 3-year average EBITDA growth rate is 2.9%, which ranks in the middle range of the companies in REITs industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, National Health Investors's return on invested capital is 7.35, and its cost of capital is 6.41. The historical ROIC vs WACC comparison of National Health Investors is shown below:
In conclusion, the stock of National Health Investors (NYSE:NHI, 30-year Financials) shows every sign of being fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in REITs industry. To learn more about National Health Investors stock, you can check out its 30-year Financials here.
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