Sector Watch: Home health-care stocks

Someone once said “There’s no place like home,” which doesn’t only ring true for wanderers far from Kansas. Many of today’s elderly, disabled or ailing may not choose to spend countless months in hospitals or clinics, and they now they have the option of in-home care by companies including Almost Family Inc. (Nasdaq:AFAM), Gentiva Health Services Inc. (Nasdaq:GTIV) and LHC Group, Inc. (Nasdaq:LHCG).

Home health-care providers will benefit from expanding Medicare enrollments, which are forecast to increase to 76.8 million by 2030 from 39.6 million in 2000. Rising home health-care spending, which is expected to grow nearly five-fold to $155 billion by 2017, reflects America’s patient preferences for care delivered at home, and the cost advantages of home health care. Costs for a day in a hospital or at a skilled nursing facility, for example, are estimated at $3,800 and $490, respectively, whereas a typical homecare visit costs around $100.

Almost Family, Inc. provides home health-care services in the Mid-West, East Coast and South. The company’s visiting nurse division supplies Medicare-certified home health nursing services to patients in need of recuperative care, while the personal care division provides in-home patient care on an as-needed, hourly or in-live basis. At year-end 2007, Almost Family operated 33 Medicare-certified home health agencies with 51 locations and 22 personal care locations.

The market reacted favorably to Almost Family’s June announcement that it was acquiring East Coast competitor Patient Care in a move that expanded the company’s presence in the Northeast with eight new locations; shares hit a 52-week high. The deal enables Almost Family to expand its footprint via new start-ups and will be also be accretive to 2009 earnings. The Patient Care purchase follows the March acquisition of Florida-based Apex Home Healthcare that gave the company three new locations in Florida. Almost Family has ample funding to pursue additional acquisitions, and raised net proceeds of $37.3 million in an April stock offering.

Almost Family recorded a strong 2008 first quarter with revenues up 23% year over year to $39 million from $31.8 million, and net income rising 47% year over year to $2.5 million, or $0.44 per share, from $1.7 million, or $0.30 per share, in the first quarter of 2007. Given analyst estimates looking for 25% average annual growth over the next five years, Almost Family appears reasonably priced at a 20 times P/E multiple. My $36 price target for Almost Family is above Tuesday’s closing price of $30.50. Shares have ranged between $13.69 and $31.85 over the last 52 weeks.

Gentiva Health Services is the nation’s largest provider of home health-care services. It serves patients across the United States through its direct service units or through CareCentrix, which manages home health services for major managed-care organizations. Gentiva delivers services through more than 300 offices in 38 states, and serves patients in all 50 states through its provider network of nearly 4,000 locations.

Gentiva’s revenues grew 8% year over year in the 2008 first quarter to $323.7 million from $299.5 million. Net income improved 13% year over year to $7.7 million, or $0.27 per share, in the first quarter of 2008 from $6.8 million, or $0.24 per share, in the prior-year first quarter. Gentiva is targeting 2008 revenues in a $1.28 billion to $1.32 billion range and per-share earnings between $1.32 to $1.40, versus 2007 revenues and per-share earnings of $1.2 billion and $1.19, respectively. Analysts predict longer-term growth for the company averaging 17% annually. My $26 price target for Gentiva is higher than Tuesday’s closing price of $22.75. Over the last 52 weeks, shares have traded between $17.03 and $23.02.

LHC Group, Inc. provides post-acute health-care services to Medicare patients in rural markets. The company offers both home-based services (primarily through home nursing agencies and hospices) and facility-based services (through long-term acute care hospitals and outpatient rehabilitation clinics). At year-end 2007, LHC operated 144 home nursing locations, nine hospices and four long-term acute care hospitals. In May, LHC announced an agreement to acquire Home Care Solutions of Nashville. The purchase expands LHC’s business in Tennessee and provides an entry into Virginia, the 13th state in which it will operate. The acquisition will also be accretive to 2008 earnings.

LHC and the others are able to supplement organic growth with acquisitions due to the fragmented nature of the home health-care market. There are approximately 13,000 agencies nationwide providing these services, more than half of which are Medicare-certified and most of which are privately owned. 

Although LHC’s revenues were up 21% year over year in the first quarter of 2008 to $83.5 million from $68.7 million, net income fell to $5.3 million, or $0.31 per share, in the first quarter of 2008 from $5.8 million, or $0.33 per share, in the first quarter of 2007.  The earnings decline reflects losses on discontinued operations, a higher provision for bad debt and increased administrative expenses. LHC expects to earn $1.30 to $1.40 per share in 2008 on revenues of $340 million to 360 million. Revenues and earnings last year were $298 million and $1.47, respectively. Analysts expect this company to produce 20% average annual growth over the next five years. My $30 price target for LHC Group represents a premium to the latest closing price of $25.10. LHC’s 52-week high has been $27.06, while it’s 52-week low has been $13.55.            

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