Recently, Medical Properties Trust (NYSE:MPW) company’s share price performance has not been stellar, but this comes at a time when the company’s fundamentals remain strong. Although the company just disclosed financial results for the second quarter of its fiscal year 2022 that disappointed the market, I believe it still has substantial upside potential for investors going forward.
Medical Properties Trust’s Good Performance isn’t Appreciated
On May 30th, I published an article in which I was quite positive about Medical Properties Trust. I described the company as a terrific opportunity with good fundamentals and a record of attractive revenue and cash flow growth. I stated that the debt levels were manageable and that the company’s yield was enticing.
As of this writing, the firm’s yield is 7.1%. I also admitted that the stock was inexpensive in absolute terms and in comparison to similar companies. All this led me to rank the company as a ‘strong buy,’ but things haven’t gone quite as expected. Shares have resulted in a 9% loss for investors since the publication of that article. In comparison, the S&P 500 gained 1.9% during the same period.
The problem with the market is that even when financial performance is strong if it is not sufficiently positive, there may still be pain for the company and shareholders. This appears to be the case with Medical Properties Trust and the financial success data it disclosed for the second quarter of its fiscal year 2022. Consider the company’s revenue, for example. Sales totaled $400.2 million during the quarter. Despite being 4.8% more than the $381.8 million generated the previous year, it fell short of analysts’ forecasts by approximately $0.7 million. FFO, or funds from operations, per share above analysts’ forecasts by $0.01, totaling $0.46 for the quarter. Despite these mixed but largely encouraging outcomes, the company’s stock dropped 4.9% in response to the announcement.
The actual performance was strong across the board. Profitability improved in addition to revenue, increasing revenues for the first half of the year to $810 million from $744.6 million the previous year. We’ve already discussed normalized FFO per share. This statistic was worth $274.7 million in absolute dollars. This is a 9.7% increase over the $250.5 million generated at the same time last year. The year-to-date results also look positive, with the metric increasing by 12.7% from $494.5 million in the first half of 2021 to $557.2 million in the first half of this year, thanks to this robust showing.
This is not to claim that everything has gone smoothly. Operating cash flow was $164.6 million in the most recent quarter, down from $176.6 million the previous year. It fell from $365.3 million to $344 million in the year’s first half. Despite the hardship, EBITDA improved from $338.6 million to $359.4 million, and year-to-date EBITDA increased from $669.9 million to $730 million.
Meeting midpoint expectations on normalized FFO per share for the fiscal year 2022 needs a normalized FFO of $1.10 billion. Other profitability metrics were not given any indication. However, suppose we believe that the year-over-year change for those will be similar to what we should see with normalized FFO. In that case, we may expect an operating cash flow of $861.1 million and an EBITDA of roughly $1.74 billion. It’s rather simple to value the company using these figures. The company is now trading at a price to operating cash flow multiple of 11.5.
This is lower than the 12.2 reading obtained from the 2021 findings. The price-to-FFO multiple is 9, a decrease from the 9.6 reading obtained using our 2021 figures. Furthermore, the EV to EBITDA multiples should fall from 12 to 11.3. To put everything into perspective, I decided to compare Medical Properties to five other businesses. These companies ranged from 10.1 to 41.9 on a price to operating cash flow basis. Two of the five firms were less expensive than Medical Properties Trust. Using the EV to EBITDA approach, the range was 14.8 to 40.6. In this circumstance, our proposition is the least expensive of the bunch.
Takeaway
Although the market is disappointed with Medical Properties Trust’s results, I view the company’s entire state favorably. Shares are attractively underpriced, the yield is strong, and the outlook for shareholders is bright, in my opinion. I still believe Medical Properties deserves a ‘strong buy’ recommendation at this time, and unless something changes, I intend to keep my shares in it for the foreseeable future.
Featured Image: Megapixl @Csakisti
