LHC Group: The leader in home-health care

Paul Rolfes | Aug 12, 2008 6:19am EDT | Comment

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It doesn’t take a CAT scan to figure out the U.S. health-care system is sick. Companies such as LHC Group Inc. (Nasdaq:LHCG) might be the prescription to help make it better.

Anyone who’s trekked off to the hospital for treatment knows that patients are going to be quickly whisked out the door afterwards. Home-health care demand is rising to a fever pitch, especially since more than 37 million Americans are aged 65 or older, and perhaps 10% need health-related assistance. That’s where LHC Group, a 14-year-old company in Lafayette, La., comes into play.

The home-health industry is highly fragmented, with many of the services coming from small, privately run operations — which account for roughly 90% of the business. Public companies like LHC Group and its competitors can shave costs from follow-up treatment after hospitalization for acute conditions — and better deal with insurance paperwork.

The Bayou Country base of operations should provide a hint to LHC Group’s niche: it focuses on rural-area geriatric care. LHC operates in 13 states, mostly in the South, and has 198 service locations (doubling since 2005). The 4,500 employees visit more than 60,000 patients annually.

LHC Group estimates its in-home care costs at $50 daily, compared to several hundred dollars in a nursing home or thousands during a hospital stay. With an aging population, Medicare enrollment is expected to double around 2030, from 42.5 million in 2005.

With a share price that’s risen about 40% in the past 12 months, LHC Group has emerged from the woods as the sector attracts investors. According to Thomson Reuters, of the 10 analysts covering LHC Group, six rate the stock a “strong buy” or “buy,” with the other four at “hold.” The median price target is $41.

Shares of LHC Group, which joined the S&P Small-Cap 600 in 2007, established a 52-week high of $31.42 on Friday, a 132% increase from the low point seen April 23. On Monday, LHC closed at $31.16.

LHC Group said that in the three months ended June 30 net service revenue grew 27.7% to $90.1 million. Second-quarter net income totaled $6.3 million, or $0.35 a share, compared with $5 million, or $0.28 a share, in the 2007 period.

The company also raised its 2008 guidance on July 30, to a revenue range of $350 million to $370 million, from the previous $340 million to $360 million, and earnings per share of $1.35 to $1.45, up from $1.30 to $1.40.

“The second quarter of 2008 was a breakout quarter for the LHC Group family and the first quarter in which the company experienced the full impact of the Medicare reimbursement changes,” said Keith Myers, LHC’s chief executive, in a statement accompanying the results. “… I believe our performance by every measure should be an indicator of what lies ahead.”

Competition is growing as consolidation continues. LHC is looking to expand its footprint, with a strategy that includes organic growth plus acquisitions, and in the past year the company has announced a string of purchases. The company also has established alliances with hospitals seeking to outsource post-acute-care treatment.

In a changing Medicare-reimbursement environment and poor overall economy, LHC reported for 2007 that net service revenue increased 36.4% to $298 million, with 81.7% of it coming from Medicare. Net income slipped to $19.6 million, or $1.10 a share, compared with $20.6 million, or $1.20 a share, for 2006. The 2007 results included a $1.7 million loss from discontinued operations. The fourth quarter fell short of expectations, and SunTrust Robinson Humphrey analyst David MacDonald called it a “sloppy” quarter.

Still, analysts seem satisfied with the progress demonstrated by LHC.

Following the release of second-quarter results, SunTrust’s MacDonald reiterated his “buy” rating while boosting his price target to $34 from $25. He wrote on July 31 that LHC is “well-positioned to capitalize” on continued acquisitions. MacDonald noted the “pipeline is full” and that management indicated in the quarterly conference call that the pace of acquisitions could increase. MacDonald raised his full-year earnings estimates by $0.08 in 2008 and 2009 to $1.42 and $1.62, respectively.

Maintaining a “buy” rating, Jefferies & Co. analyst Arthur Henderson wrote on July 31 that LHC is “the most compelling Buy in the home nursing sector at the moment.” He raised his 12-month target to $35 from $31 and raised his full-year EPS estimates a few pennies, to $1.35 for 2008 and $1.60 for 2009.

Joining the bump-up fray was Ralph Giacobbe of Credit Suisse, who maintained an “outperform” rating, while raising his price target to $28 from $27 (when LHC was trading around $23). He wrote the company exhibited in the quarter “strong volume-driven top-line growth, steady margins, nice improvement in DSOs (days sales outstanding), and solid cash flow.” His also raised his earnings outlook to $1.41 and $1.65 for 2008-09 on July 30.

Deutsche Bank’s Darren Lehrich kept the stock at “hold” in a July 31 note, but raised his price target to $30 from $23 and earnings estimates for this year (to $1.45 from $1.32) and in 2009 (to $1.76 from $1.48). The second quarter “gives us much greater confidence in its ability to manage growth,” and he’s “favorably inclined” on the company’s strategic position, while noting that his target is 17 times 2009’s earnings-per-share estimate, in line with the home-health sector’s historical trading range.

Home-health probably isn’t the cure-all for the problems facing U.S. health care. But such service providers as LHC Group could help cut some of the costs.