Stock Analysis

Here's Why I Think CareTrust REIT (NASDAQ:CTRE) Is An Interesting Stock

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NYSE:CTRE
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It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.

In contrast to all that, I prefer to spend time on companies like CareTrust REIT (NASDAQ:CTRE), which has not only revenues, but also profits. Even if the shares are fully valued today, most capitalists would recognize its profits as the demonstration of steady value generation. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.

Check out our latest analysis for CareTrust REIT

How Quickly Is CareTrust REIT Increasing Earnings Per Share?

The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That makes EPS growth an attractive quality for any company. It certainly is nice to see that CareTrust REIT has managed to grow EPS by 23% per year over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). I note that CareTrust REIT's revenue from operations was lower than its revenue in the last twelve months, so that could distort my analysis of its margins. The good news is that CareTrust REIT is growing revenues, and EBIT margins improved by 4.6 percentage points to 58%, over the last year. Ticking those two boxes is a good sign of growth, in my book.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

earnings-and-revenue-history
NasdaqGS:CTRE Earnings and Revenue History February 2nd 2021

While we live in the present moment at all times, there's no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, for CareTrust REIT?

Are CareTrust REIT Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. Of course, we can never be sure what insiders are thinking, we can only judge their actions.

We haven't seen any insiders selling CareTrust REIT shares, in the last year. With that in mind, it's heartening that Spencer Plumb, the Independent Director of the company, paid US$19k for shares at around US$12.77 each.

The good news, alongside the insider buying, for CareTrust REIT bulls is that insiders (collectively) have a meaningful investment in the stock. To be specific, they have US$40m worth of shares. That's a lot of money, and no small incentive to work hard. Even though that's only about 1.8% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

While insiders already own a significant amount of shares, and they have been buying more, the good news for ordinary shareholders does not stop there. That's because on our analysis the CEO, Greg Stapley, is paid less than the median for similar sized companies. I discovered that the median total compensation for the CEOs of companies like CareTrust REIT with market caps between US$1.0b and US$3.2b is about US$3.9m.

CareTrust REIT offered total compensation worth US$3.2m to its CEO in the year to . That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of good governance, more generally.

Should You Add CareTrust REIT To Your Watchlist?

You can't deny that CareTrust REIT has grown its earnings per share at a very impressive rate. That's attractive. The cranberry sauce on the turkey is that insiders own a bunch of shares, and one has been buying more. So I do think this is one stock worth watching. Still, you should learn about the 3 warning signs we've spotted with CareTrust REIT .

The good news is that CareTrust REIT is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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What are the risks and opportunities for CareTrust REIT?

CareTrust REIT, Inc. is a self-administered, publicly-traded real estate investment trust engaged in the ownership, acquisition, development and leasing of skilled nursing, seniors housing and other healthcare-related properties.

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Rewards

  • Trading at 38.6% below our estimate of its fair value

  • Earnings are forecast to grow 108.22% per year

Risks

  • Debt is not well covered by operating cash flow

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