- By GF Value
The stock of Sabra Health Care REIT (NAS:SBRA, 30-year Financials) appears to be modestly overvalued, 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 $17.94 per share and the market cap of $3.8 billion, Sabra Health Care REIT stock is estimated to be modestly overvalued. GF Value for Sabra Health Care REIT is shown in the chart below.
Because Sabra Health Care REIT is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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. Sabra Health Care REIT has a cash-to-debt ratio of 0.03, which is worse than 71% of the companies in REITs industry. The overall financial strength of Sabra Health Care REIT is 4 out of 10, which indicates that the financial strength of Sabra Health Care REIT is poor. This is the debt and cash of Sabra Health Care REIT 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. Sabra Health Care REIT has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $598.6 million and earnings of $0.67 a share. Its operating margin is 42.71%, which ranks in the middle range of the companies in REITs industry. Overall, GuruFocus ranks the profitability of Sabra Health Care REIT at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Sabra Health Care REIT 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 Sabra Health Care REIT is -9.2%, which ranks worse than 83% of the companies in REITs industry. The 3-year average EBITDA growth rate is -16.2%, which ranks worse than 76% 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, Sabra Health Care REIT's ROIC is 4.35 while its WACC came in at 8.67. The historical ROIC vs WACC comparison of Sabra Health Care REIT is shown below:
In closing, the stock of Sabra Health Care REIT (NAS:SBRA, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 76% of the companies in REITs industry. To learn more about Sabra Health Care REIT stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.