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What's in the Offing for HCP Inc (HCP) This Earnings Season?

HCP Inc. HCP is slated to report third-quarter 2017 results on Nov 2, before the opening bell.

Last quarter, this Irvine, CA-based healthcare REIT delivered a positive surprise of 2.13% in terms of funds from operations (FFO) per share. Results reflected growth in three-month same-property portfolio cash net operating income (NOI).

The company has a decent surprise history. In fact, over the trailing four quarters, the company exceeded estimates in each occasion, generating an average positive surprise of 3.3%. This is depicted in the graph below.

HCP, Inc. Price and EPS Surprise

HCP, Inc. Price and EPS Surprise | HCP, Inc. Quote

Note: The EPS numbers presented in the above chart represent funds from operations (“FFO”) per share.

However, HCP’s shares have lost 14.3% of its value, year to date, underperforming the industry’s gain of 2.5%.

Let’s see how things are shaping up prior to this announcement.

Factors to Consider

HCP enjoys a diversified, well-balanced portfolio in the healthcare sector. In the to-be-reported quarter, the company is likely to gain from rising healthcare spending and a growing aging population. Importantly, strategic investments, tie-ups and acquisitions are anticipated to drive decent cash flows.

The company also remains on track with its deleveraging plan and its balance sheet is likely to reflect that. However, as part of such efforts, it significantly disposed non-core assets. While such moves are a strategic fit for the long term, the company cannot bypass the dilutive impact on earnings in the near term from huge asset dispositions.

Moreover, growth might be hindered by cut-throat competition in HCP’s markets. In addition, there is increased supply in senior housing category. As this curtails landlords’ pricing power and limits growth in occupancy level, the prevalent oversupply situation is expected to impact the company’s third-quarter numbers.

Amid these, the Zacks Consensus Estimate for third-quarter revenues is pegged at $450.4 million, marking an estimated plunge of 31.2% year over year.

Also, HCP’s performance during the quarter was inadequate to win analysts’ confidence. In fact, the Zacks Consensus Estimate moved down 2.1% to 46 cents in two months’ time.

Earnings Whispers

Our proven model does not conclusively show that HCP will likely beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. But that is not the case here, as you will see below.

Zacks ESP: The Earnings ESP, which represents the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +0.22%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: HCP has a Zacks Rank #4 (Sell).

While a positive ESP is a meaningful and leading indicator of a likely positive surprise, its combination with a Sell-rated rank leaves our prediction inconclusive.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Regency Centers Corporation REG, slated to release third-quarter results on Nov 1, has an Earnings ESP of +2.96% and a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sabra Health Care REIT, Inc. SBRA, scheduled to release earnings on Nov 1, has an Earnings ESP of +1.56% and a Zacks Rank of 3.

Boston Properties, Inc. BXP, set to release quarterly numbers on Nov 1, has an Earnings ESP of +0.55% and a Zacks Rank of 3.

Note:  FFO, 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.

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