The stock of Diversified Healthcare Trust (NAS:DHC, 30-year Financials) is estimated to be 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 $3.575 per share and the market cap of $851.8 million, 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 0.09, 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.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Diversified Healthcare Trust has a cash-to-debt ratio of 0.18, which is better than 78% of the companies in REITs industry. The overall financial strength of Diversified Healthcare Trust is 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:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Diversified Healthcare Trust has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $1.6 billion and loss of $0.91 a share. Its operating margin is 3.09%, which ranks worse than 89% of the companies in REITs industry. Overall, GuruFocus ranks the profitability of Diversified Healthcare Trust at 6 out of 10, which indicates fair profitability. 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 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 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 75% of the companies in REITs industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Diversified Healthcare Trust's ROIC was 0.74, while its WACC came in at 6.62. The historical ROIC vs WACC comparison of Diversified Healthcare Trust is shown below:
Overall, the stock of Diversified Healthcare Trust (NAS:DHC, 30-year Financials) is believed to be possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 75% of the companies in REITs industry. To learn more about Diversified Healthcare Trust stock, you can check out its 30-year Financials here.
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