National HealthCare Corp (NHC)

National HealthCare operates long-term healthcare centers which include assisted living and independent living centers. Its business activities include providing skilled and intermediate nursing and rehabilitative care, senior living services and insurance services. The company manages 74 long-term health care centers with 9,177 beds in 10 states and provides other services in two additional states.

The long-term care industry has gone through a long period of financial distress caused by material reductions in government payments for services and dramatic increases in the cost of professional liability insurance. As a result, the company has limited its expansion efforts and used cash generated from operations to repay debt. Long term debt has reduced from nearly $60 million in 2000 to $13 million in 2005. The publicly sponsored programs, Medicare and Medicaid, are themselves facing an issue, wherein the ratio of the employed paying taxes to people drawing benefits is decreasing, while the price of health care services is continuously rising. The company derives bulk of its revenue from Medicare and Medicaid premiums. Consequently, any reduction in reimbursement or payments would have a direct and negative bearing on its earnings. Also, the company faces stiff competition from WellPoint and United HealthCare.

For the nine months ended September 2006, revenues increased by merely 4.5% reflecting 7% increment in net patient revenues and 5% decrease in other revenues. National HealthCare recently announced that it would buy National Health Realty, a real estate investment trust it spun off in 1997, in a cash and stock deal. This merger will provide a larger asset and equity base that is anticipated to enhance the company’s future growth and long term increases in shareholder value. However, the deal will build an extra pressure on the slow growing profits of the company in the near term and in a very competitive scenario, which makes it an underperformer.