Issue #46: An income-generating stock in a highly resilient sector and a management-driven turnaround story. 🚨

Here’s what we found this week:

Medical Properties Trust is a REIT invested in a global portfolio of healthcare properties. Long-term leases drive reliable income, the dividend yield is compelling, and the business is recession-resistant.

Coty is a global beauty and personal care company with a wide portfolio of well known brands. A new and highly qualified management team is reversing several years of decline with a fresh and aggressive approach, and results so far are impressive.

Medical Properties Trust. ($MPW)

$21.37 – Share price at time of writing

Source: tradingview.com

Summary:

  • Medical Properties Trust is a Real Estate Investment Trust (REIT) that acquires and develops leased healthcare facilities.
  • $MPW has investments in 430 facilities in the US, Europe, Australia, and Colombia.
  • $MPW Total Shareholder Return has consistently outpaced healthcare REIT averages.
  • Dividend yield currently stands at 5.3% and the dividend has increased every year for 8 consecutive years.

What they do:

Medical Properties Trust is a Real Estate Investment Trust (REIT). It acquires and develops healthcare facilities and leases them to healthcare operators. The leases are for long terms and require the tenants to pay most costs associated with the properties.

The Company currently has 430 facilities with 430,000 beds. It operates in 33 states of the US, six countries in Europe, and in Australia and Colombia. The Company also makes secured mortgage loans to healthcare operators and sometimes acquires an equity interest in healthcare operators.

$MPW is the second-largest private owner of hospital facilities worldwide.

74% of $MPW assets are general acute care hospitals, the most common type of hospital. The Company also invests in several other facility types.

  • Inpatient Rehabilitation Hospitals (11% of assets)
  • Behavioral Health Facilities (8% of assets)
  • Long Term Acute Care Hospitals (2% of assets)
  • Freestanding ER/Urgent Care Facilities (1% of assets)
  • Other (4% of assets)

No single facility makes up more than 3% of total assets, leaving a highly diversified portfolio that is well insulated against failure or stress in any single asset or region.

$MPW tenants hold triple net leases, under which they agree to pay all taxes, insurance, and maintenance costs.

What we learned from social media patterns:

$MPW is not a social media darling. That’s not surprising. Social media discussion tends to focus on stocks with high growth potential. Nobody is going to post “$MPW to the moon” with a string of rocket emojis.

REITs in general tend to appeal to long-term investors who seek a combination of income and value. There is some discussion of REITs, and there are mentions of $MPW, but it is not a trending stock and is not likely to become one.

Notable comments from Reddit:

“I’ve owned it for over 5 years. Purchased when it was at $12/share. Obviously I’ve really enjoyed it. If the share price ever oscillates below $20/share – load up and historically you could enjoy a nice +10% share value appreciation alongside the dividend. Having said that, I firmly believe in time in the market over timing the market so maybe you don’t want to wait for a dip.”

– sandersking

“I’m in MPW for about a 4.71% gain. It’s a solid REIT and what they are, will always be backed. Definitely not going to be a giant gainer, but they are a decent choice for long IMO. I buy a couple shares everytime they dip.”

– glocksnstocks

💸 Signal: Ken Griffin of Citadel trades in and out of MPW regularly, and has purchased 819,000 shares in the last two quarters.

Why $MPW could be valuable:

The global healthcare industry is expanding at a steady, continuous rate, driven by aging populations in developed nations and improving access to care in many emerging economies.

Source: Stratistics

Healthcare is a highly resilient industry that is traditionally immune to recessions and market downturns. People still get sick and need treatment, wherever the economy goes.

$MPW has a geographically diverse portfolio of properties held on highly stable long-term leases, providing reliable, predictable revenue. 86.9% of its leases extend past 2030. The average remaining lease term is 15.7 years.

$MPW has consistently generated higher Total Shareholder Return (TSR) than the benchmark SNL US REIT Healthcare Index.

Source: Medical Properties Trust

Like all REITs, $MPW must distribute at least 90% of taxable income to shareholders as dividends. The Company has increased its dividend for 8 consecutive years and the trailing yield currently stands at a very attractive 5.21%.

The strength and sustainability of the dividend protects the stock against sudden drops. If the stock price drops the dividend yield increases, which tends to draw in dividend-focused investors and support the stock price.

$MPW’s most recent quarter saw a 16% increase in earnings over the equivalent quarter last year. The Company expects FY 2021 EPS to land between $1.16 and $1.20, a 43% to 48% gain over FY 2020.

14 analysts currently cover $MPW. The consensus ranking is “Buy” and the average price target is $24.43, 14% above the current price.

$MPW trades at a trailing P/E of 22.18. Leading competitors Ventas and Welltower trade at P/E ratios of 87.04 and 74.62 respectively, and both have significantly lower growth figures.

EBITDA is a more common valuation metric for REITs, and here too $MPW (shown in orange) seems attractively valued compared to competitors.

Source: Seeking Alpha

What the risks are:

Medical Properties Trust has expanded significantly, acquiring properties in multiple markets. Failure to integrate these properties or inaccurate assessments of their earning potential could affect results.

One customer, Steward Health LLC, operates 21% of $MPW assets. Steward is a well-managed and well regarded operator, but this is still a significant exposure and negative results for Steward could affect $MPW. Several other tenants account for significant percentages of revenue.

$MPW tenants operate in a highly regulated industry, with facilities in multiple markets with different regulatory regimes. Regulatory issues affecting tenants could affect results.

COVID-19 had an adverse impact on the cash flow of many $MPW tenants, as clients deferred the elective procedures that hospitals rely on for revenue. A resurgence in the pandemic could place tenants under stress.

$MPW carries a significant debt load, most of it incurred for the purchase of new facilities. If these facilities fail to generate the expected returns or if profit margins decrease, the debt load could force a reduction in the dividend, which would have an adverse impact on the stock price.

Bottom line: $MPW is an income-generating play in a highly resilient industry with strong results and an attractive dividend yield. It will appeal to income investors or investors seeking to build a defensive component to their portfolios.  

Coty Inc. ($COTY)

$9.40 – Share price at time of writing

Source: tradingview.com

Summary:

  • Coty is one of the world’s largest beauty companies, with a range of prominent brands across fragrance, cosmetics, and skin and body care.
  • Coty brands span the price range from mass market to prestige brands, opening up a wide market.
  • The Company was heavily affected by the pandemic but has restructured and adopted an aggressive transformation plan.

What they do:

Coty was founded in 1904 and has grown into one of the world’s dominant beauty and fashion companies. They produce a range of mass-market and prestige fragrances, cosmetics, and skin and body care products under a variety of brands.

Source: Coty FY 2021 Annual Report

Coty products are sold in approximately 130 countries and territories.

Coty has distributed its manufacturing operations around the world. Most Coty products are manufactured in the region in which they are sold, providing some insulation from logistics bottlenecks.

Coty is a world leader in developing products that are free of animal-derived ingredients, not tested on animals, and are environmentally sustainable.

Mass-market brands are sold through supermarkets, department stores, pharmacies, and other traditional retailers, along with dedicated e-commerce retailers.

Prestige products are sold through prestige retailers, perfumeries, major department stores, duty-free shops, online retailers, and other outlets.

The single largest sales outlet is Wal-Mart, accounting for 7% of revenue.

What we learned from social media discussion:

$COTY is not heavily discussed on social media, but there was a substantial spike in attention correlating with the release of the company’s Q1 FY2022 results.

$COTY is a traditional player in a traditional business, and is not a Company we’d expect to see in the top tier of social media interest, which tends to look at more exciting tech stocks.

Notable comments from Reddit:

“The new CEO seems great. I think what they’re doing in Asia is really smart (Gucci partnership). And Asia is open and its a culture that loves brands and dressing up.

As people get vaccinated the weather gets nicer, people will be going out again and will want to look nice. There will probably even be an uptick in weddings and special events too.”

– Stephh075

“COTY is extremely interesting to me because it has so many moving pieces that even Wall Street analysts are divided as to what the value of COTY is today. COTY was like a beaten up F1 that was ran by an incompetent manager, driver and mechanic (the owner is still the same). So, they hired a new manager (Sue Nabi), mechanics (KKR) and drivers (all the new Execs) and were able to sell some car parts, re-do the entire engine, to perform faster on the track. Until it wins a few races and proves that it can compete and win there will be doubt.”

– ValueMaverick

💸 Signal: Joel Greenblatt of Gotham Funds has purchased 192,000 shares of $COTY in the last 3 quarters. Coty Insiders have made 23 stock purchases and only 6 sales since the start of 2020.

Why $COTY could be valuable:

The global beauty and personal care market are expected to grow at a CAGR of 4.82% through 2026.

Long term growth drivers include rising prosperity and the strength of Western brands in China and the rest of emerging Asia. Pandemic recovery and the large-scale return of women to the workforce is also expected to boost demand.

Coty is a double turnaround play. In 2015 and 2016 the Company was trading in the $25 to $30 range. The $12 billion acquisition of multiple makeup brands from Procter and Gamble in 2016 proved difficult to absorb, there was rapid turnover in the executive ranks, and investors lost confidence, with the share price dropping to the $10-$15 range in 2019.

In 2020 COVID-driven lockdowns sliced revenues in half and drove share prices to a low under $3.

In mid-2020 Coty hired Sue Nabi as CEO. Nabi is an industry veteran and a former President of Lancôme and L’Oréal. The new CEO moved quickly to drop some underperforming brands, reposition others, and introduce new products. She boosted marketing spending and specifically targeted the Chinese market.

The results have been dramatic. Q4 2021 sales, announced August 26, 2021, were nearly double Q4 2020 sales. The loss of $48.6 million was down from a loss of $1.236 billion in 2020, and the Company is targeting a return to profitability in 2022.

Q1 2022 results continued the trend. Revenues increased 21%, riding an increase in brick-and-mortar sales and a striking 23% jump in e-commerce sales. Prestige product sales were up 34%. New product launches boosted sales and sales in China grew 50%.

$COTY also cut costs by $60 million and retired $200 million in debt.

Coty is implementing a plan to slash its debt load – a serious issue since the 2016 Procter and Gamble deal – from 5x EBITDA at the end of FY 2021 to 2x EBITDA by 2025.

$COTY trades at 1.48x trailing 12 month sales, well behind major competitor L’Oreal at 7.48x and Estée Lauder at 7.25x.

17 analysts cover $COTY, with an average ranking between “Hold” and “Buy”. The consensus price target is $12.67, 28.6% above today’s level.

What the risks are:

The $COTY turnaround is driven primarily by a small group of senior executives, notably CEO Sue Nabi and CFO Laurent Mercier. If the company was unable to keep them onboard the ambitious plans currently being implemented could be derailed.

$COTY suffered badly during the pandemic lockdown period. A resurgence of the pandemic with more lockdowns could weaken sales.

$COTY carries a significant debt load of $5.6 billion, much of it left over from the 2016 Procter and Gamble acquisitions. The Company is actively implementing a deleveraging plan but any significant drop in sales could create issues with debt service.

Analysts expect $COTY to return to profitability in FY2022. Failure to achieve this benchmark could have a significant impact on the stock price.

Bottom line: $COTY is a management-driven turnaround play. The Company has a strong brand presence in a growing global industry and the current management team appears to be effectively improving results after a period of decline.

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