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 . . .

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