Share prices of Medical Properties Trust (NYSE: MPW) are trading down more than 55% from a year ago. As a result, the real estate investment trust (REIT) pays a high dividend yield of nearly 15%. That would make for an attractive payout -- if it's safe.
But the problem is there is no shortage of risks here, including real concerns about multiple tenants. And despite that, analyst price targets remain relatively high. The consensus price target suggests that Medical Properties Trust stock could rise by more than 65%. Is that a realistic outlook for this beaten-down stock, or are analysts wrong about Medical Properties Trust?
Recent price targets suggest that investors can't go wrong with buying the stock right now
The majority of analysts lowered their price targets for Medical Properties Trust over the past several months. But even with those reductions, the projected upside remains high. Here's a breakdown of the potential upside for the stock given the last 10 price targets that analysts have set for Medical Properties Trust.
Source: MarketBeat. Chart by author. Note: Only the 10 most recent analyst forecasts are included.
Are lower price targets warranted?
What's notable from the following chart is that price targets have been trending downward; late last year, there were a couple of price targets at $18 a share, whereas the last three targets have been no higher than $12. In light of more recent data, analysts appear to be less optimistic about the stock's near-term future. It was about a year ago that Medical Properties was last trading at around $18 per share.
Source: MarketBeat. Chart by author.
A lot has changed since then. Interest rates continued to rise, which is bad for REITs like Medical Properties that carry significant debt (as of the end of March, it had debt totaling $10.4 billion).
The company has also stated it didn't collect the full rent from one of its largest tenants, Prospect Medical. Meanwhile, another one of its top tenants, Steward Health, needed to extend its credit agreement last year. And on Medical Properties' most recent earnings report (for the period ended March 31), its funds from operations (FFO) of $0.31 per share was barely higher than the $0.29 quarterly dividend it pays. A year ago, FFO per share was $0.47.
Clearly, things aren't looking as good for Medical Properties Trust as they did a year ago, and so lower price targets are certainly justifiable. And in light of the earnings numbers and rent collection issues, I'm inclined to believe that as more analysts update their projections, their price targets will also be lower, bringing down the consensus price along with those updated targets.
In some cases, analyst price targets may not be as wrong or overly bullish as perhaps they are outdated. Although targets project where a stock may be in the next 12 to 18 months, there's little reason to be optimistic about Medical Properties Trust because while its tenants are in healthcare and should be more stable, a looming recession and tougher economic conditions don't bode well for the REIT.
Investors shouldn't buy the stock based on analyst expectations
Analyst expectations and price targets can sometimes help you uncover potentially good investments because they can shine a light on a business with lots of growth potential. But it's important to also consider the context of when those price targets were set and what has happened to a business since then. In Medical Properties' case, things have deteriorated and it faces an uncertain road ahead. While the dividend yield may appear tempting, it comes with some serious risks.
At the very least, investors should take a look at the next earnings report or two before making a decision on the stock, as that could help paint a clearer picture of how the business is doing and whether the company is becoming a better buy, or if things are getting worse.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
