Help, I've Fallen And I Can't Get Up
Yes, I know I just completely ripped off Life Alerts trademark motto and I'm sure they'll somehow seek retribution against me at a later date (or perhaps they'll just be thrilled someone remembers they exist)! Either way, the home healthcare sector has indeed fallen on hardships and is having one hell of a time getting back on its feet.
What really started the chain of events which sent the largest home healthcare providers falling was an SEC formal investigation and subpoena into their visiting and billing practices. According to the formal investigation it is alleged that many, if not all, of these large home health providers hit specific visiting targets with patients in order to receive higher reimbursement levels through Medicare. I'd be shocked here about these allegations if this story didn't surface once every three years, give or take a few months. It doesn't matter how home healthcare companies run their business, or insurance providers for that matter, because every few years the government cries wolf and the sector goes into panic mode.
What I'm here to remind most of you is that the general long-term trend in the home healthcare sector is moving higher, growth rates are solidly in the 6%-7% range for the long-term, many have ample cash reserves and most importantly, nearly all are turning in very large gross profits. Despite continuing changes to Medicare and its underlying laws on how these home healthcare providers get paid, many are chugging along now at historically low price to book and price to earnings valuations, so much so that I felt compelled to write a blog about it.
To me, there are three key names which stand out as potential winners over the course of the next two to three years. Despite this pending formal investigation I think we can look at history to show us that either way their wrists will receive a firm slap and they will be sent on their way with a scout's honor promise not to do it again (if they even did it in the first place). Panic selling is the absolute bane of this sector and it renders itself every few years, but it has also proven a fairly accurate entry point to decent profits. Although these companies are undervalued currently in my opinion, I expect that they will likely fall an additional 15-30% before they've reached a bottoming point.
Amedisys Inc. (NASD: AMED)
Amedisys is one of those larger home health care providers to receive a formal subpoena from the SEC. Amedisys responded to that formal investigation with a letter of its own defending its billing and visiting practices. Either way, this formal investigation should have little no to impact on AMED going forward which means they are free to continue being a cash cow and rack up those profits for investors. Amedisys is currently trading at only 0.9 times its book value and even with future growth estimates taken down to their lowest levels in nearly a decade at just 5%-6%, they are only at 5.7 times 2011's profit projections. Amedisys is more than capable of turning a gross profit of almost 300M dollars and they are easily one of the best managed home healthcare providers on the market. Insider buying has miraculously showed up again and from a historical perspective the time to buy would be in the low $22 range. From a managerial perspective, it's encouraging to see the founder of Amedisys still running the ship. He has surrounded himself with numerous board members with 2-3 decades in the field and roughly 7-10 years of tenure with the company. Amedisys is a solid company, with strong profits and a good long-term growth outlook. I would place a fair value on AMED around $36.75 a share.
Almost Family (NASD: AFAM)
Almost Family is almost a buy if the almost panic contagion in the home healthcare sector pushes them over the edge of a technical cliff. Almost Family does trade at a higher multiple than the majority of the sector but it also boasts a considerably more attractive long-term growth rate of 9% while the other big names grow closer to 6%. AFAM is net cash positive by about $3 and trading currently at 1.4 times book and about 8 times 2011's profit projections. Although Almost Family has released no information regarding its billing and visiting practices, I'd remain fairly confident in their business practices and not worry too much about those financials. But, given their recent silence in the midst of this SEC probe I have chosen to give AFAM the greatest downside possibility of this bunch. I think AFAM makes a great buy around $17 if it makes it there. Their long-term growth rate is significantly higher than their peers and six out of their seven directors/officers have been with the company for 10-17 years, so they are a cohesive and organized company. I would place a fair value on AFAM of $31.00 a share.
Gentiva Health Services (NASD: GTIV)
Gentiva dipped below its book value today and has lost almost 1/3rd of its value on news that the SEC is investigating the way home health company's bill and collect revenues. I think this will result in yet another hand slap for the industry and will have little to no material impact on the sector. Fear and panic have swept in to drag down GTIV but trading at roughly 7.5 times forward profits there is plenty to be cheery about. Long-term growth rates here are 7% so the PEG is right in line if not below the industry average and although they are 55M in the debt hole, they are churning nearly 100M in gross profits each year, so this doesn't worry me one bit. I am mildly peeved that Gentiva hasn't defended itself of its practices like competitor Amedisys has, but I don't think you can expect a large material impact on earnings because of it. Gentiva, like Almost Family, is going to have more potential downside than Amedisys because they are more question marks surrounding those practices since no rebuttal to the probe has been received. With that, I am thinking that an entry around $15 makes a lot of sense. The only true concern I have with Gentiva is just how cohesive the management team is. Out of the six highest ranking officers, most have been with the company two to eight years and that frankly isn't enough time for me to get all "jazzy" about their track record. I will say they have done well so far and with that I am willing to call a $23.75 a fair valuation on Gentiva.