The Ensign Group: When I'm 64
It’s not often that you hear “nursing home” and “industry” in the same sentence. Although the growing population of seniors in the United States would suggest that the business of caring for the aged is indeed a high-growth industry, the sector remains highly fragmented, with many independent homes operating in a state of neglect, or at far below peak efficiency.
One of the most aggressive business models for squeezing more profits out of the nation’s many poorly managed nursing homes comes from The Ensign Group, Inc. (Nasdaq:ENSG), a nine-year-old Mission Viejo, Calif. company that acquires or takes over management of underperforming facilities and restores them so that they can take in more patients, and ultimately, more profits.
Think This Old House for the assisted living crowd. Ensign operates 61 nursing care facilities in the western United States, including 26, which it owns, and 35 on which it holds long-term leases. It says some of the homes it has acquired had occupancy rates as low as 30% before it took over management. Today, it boasts an average occupancy rate of close to 80% and says its most mature facilities are operating above 90% capacity.
Those numbers alone should make a compelling case for Ensign’s long-term growth potential. The company’s past financial data show its ability to execute on its strategy. Ensign’s revenues grew to $411.3 million last year from $358.6 million in 2006 and $300.9 million in 2005. Net income has been somewhat more erratic. In 2007, when Ensign completed an initial public offering, its net income dipped to $20.5 million from $22.6 million in 2006, but above the $18.4 million earned in 2005.
Two analysts who follow Ensign project revenue growing to $463.9 million this year and $512.1 million in 2009, and estimate that net income will rise to $1.31 per share this year and $1.55 in 2009, versus $1.17 in 2007.
The company’s stock price has been volatile since it went public at $16 last November, swinging between a high of $16.55 and a low of $7.50. It currently trades at about $11.25 per share, but analyst James Bellessa of D.A. Davidson & Co. has a $20 price target on the stock over the next 12 to 18 months.
In the interest of full disclosure, D.A. Davidson was the lead underwriter of Ensign’s IPO last year. Nonetheless, Bellessa does offer a number of fundamental reasons why Ensign’s business of taking over underperforming or troubled facilities should pay dividends.
He stresses that in addition to restoring quality care and boosting occupancy rates at these facilities, Ensign works to shift the patient mix toward those who both require a high level of skilled nursing care and are covered by insurance, preferably Medicare or managed care, that have high reimbursement rates.
“We believe Ensign has ample opportunities to expand through organic growth, operating inefficiencies and acquisitions,” Bellessa wrote in a research report last year when he initiated coverage of the stock, noting that Ensign currently operates less than 0.5% of the industry’s beds.
Ensign’s growth strategy, in other words, has multiple prongs, including improved performance from existing facilities, expansion through acquisitions, shifting the patient mix toward those with the best insurance policies, and simply tapping into the growth of the senior population, a trend that is not projected to reverse any time soon. According to the American Association of Homes and Services for the Aging, the population of Americans over 65 will double by 2026 to 71.5 million. Among people turning 65 today, 69% are expected to need some form of long-term care.
If all this talk of profiting from elder care leaves you feeling a little uneasy, you might be on to something: optimal care and optimal profits are not mutually exclusive, but they can make strange bedfellows.
Case in point: a former resident of one of Ensign’s California facilities in 2006 filed a class action suit alleging the company engaged in various unlawful business practices including understaffing. Ensign has offered little comment on that case, which is ongoing.
In addition, while Ensign’s most recent quarterly sales and earnings growth was robust, management told analysts that it had not turned around some of its newer facilities as swiftly as it had hoped. This was not a major point of concern since total first-quarter revenue rose 16.1%, but it did raise some questions about just how aggressively Ensign could execute on its strategy.
As a business that derives a big chunk of revenue from government-sponsored insurance plans such Medicare, Ensign could also be vulnerable in the long term to any possible changes in reimbursement policies. That, along with various execution and legal challenges it is already facing, underscore how this relatively young company still has some kinks to work out in its business model.
That said, the fundamental growth potential appears solid. Even if Ensign fails to meet its own aggressive growth targets due to tighter regulations or other factors, it will likely remain a growth business, serving a population that is expanding rapidly and showing increased demand for the services it provides.
About the Author
Contributing author Andrea Orr has worked as a financial and business journalist for more than 15 years in New York, Los Angeles and northern California.
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