January 1st Update

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This Home Health Index (HH Index) measures the performance of four publicly traded home health companies, all listed on the NASDAQ — Almost Family (AFAM), LHC Group (LHCG), Gentiva (GTIV) and Amedisys (AMED). This index is updated monthly.
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Quote of the Month…. on the Fiscal Cliff:

“This deal proves that if we all procrastinate long and hard enough, we can semi-solve any self-inflicted problem at the very last minute in a way that satisfies no one.

Much work needs to be done.  Its now up to us to concoct entirely new optional disasters that we will have to undo at some later date in a more or less half-assed way.”

Senate Minority Leader Mich McConnell

UPDATE:  The Stoneridge Partners Home Health Index gains 34.7% for the year.

Here are the results for the month of December and for the calendar year:

Company Stock Price 11/30/12 Stock Price 12/31/12 Change in % Month Change in % YTD
Almost Family 19.84 20.26 +2.12% +22.20%
Amedisys 10.47 11.31 +8.02% +3.67%
Gentiva 10.30 10.05 -2.43% +48.89%
LHC Group 19.39 21.79 +12.38% +69.84%
Home Health Index 15.00 15.85 +5.68% +34.71%
S&P 500 1416.18 1426.19 +0.71% +13.41%

Although the 34.7% increase for the year makes good headlines, a closer look reveals that all of that increase took place in the first quarter.  On April first the index was at 16.9, so there has been a drop in the index of 6.4%  for the last nine months while the S&P 500 increased by 1.2% for that same period.

For the year, LHC Group led the group with a 70% increase while Amedisys’ increase of 3.67% trailed everyone.

This past month the only stock down was Gentiva.

The high for our Index was set in September, 2008 at 41.75.  Since then a huge drop.

We also note that on December 31,  Addus HealthCare’s stock was  at 7.15 up a sparkling 100% for the year.  Impressive. They are a public company (NASDAQ:ADUS), but, because they are not heavily dependent upon Medicare revenue, they are not in our HH Index.

GRAPHS:  This first graph shows the HH Index compared to the actual prices of the individual companies that make up the chart through December, 2012.

Note that by hovering your pointer over a spot, you will get the price at that point.  For the past decade, it’s been quite a ride

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Stoneridge Partners Home Health Index vs. S&P 500 Index

This second chart compares the percentage change of the HH index to the percentage change in the S&P 500 index through December, 2012.

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Stoneridge Partners Home Health Index 12 Months Trailing

This third graph is a 12 month trailing chart of the HH Index compared to the actual prices of the individual companies that make up the chart, through December, 2012.

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INDUSTRY GROWTH – In last month’s column we had a chart that showed third quarter results for the previous three years showing virtually no revenue growth while actual gross profit dollars actually decreased by 9%.  Certainly not a growth story for these public companies.

MERGER & ACQUISITION OUTLOOK

As our graphs show, there has been a substantial drop in these stock prices.  Perhaps as a result, we have seen a large drop-off of acquisitions by these public companies.   The high for our Home Health Index was set on October 1, 2008 at 41.75.  It dropped to 32 on April 1, 2011, and now sits at 15.85.  EBITDA multiples and market cap (selling price) as a percentage of revenue are at historically low levels.

The key word here may be “Accretive”.   Accretive acquisitions are supposed to add more value to the acquiring company than the cost of the acquisition.

Looking at a company like Almost Family that has a positive balance sheet, their market cap is at about $187 million while their revenue run rate is $340 million, meaning the company is selling for about 55% of revenue, with an EBITDA multiple of about 5.

It may be difficult for a company like that to justify paying 80% to 100% of revenue, or multiples of 5 or better for  companies that may not be as well run as their own.

Perhaps as a result they recently paid out a dividend of about $20 million to shareholders….money that could have been used to fund acquisitions.

That does not mean that M&A activity has been slow.  To the contrary we closed on six transactions in the month of December alone.  This void has been filled by new categories of buyers such as hospitals and senior living companies, along with private equity groups and private equity backed regional companies.

Examples include Kindred’s recent purchase of Texas based Integracare at about 100% of revenue, and Emeritus Senior Living’s purchase of Nurse-On-Call.

The end result is that, although prices are not what they were in 2008, we continue to see solid demand for quality agencies with remarkably good prices.  The word quality needs to be emphasized, as transactions with questionable clinical or Medicare statistics, or poorly prepared financial reports simply gain no traction.

What we find most interesting is The Washington Post’s recent acquisition of Celtic Healthcare.  Here is a new entry into the home health market by a company that really does their research (owned in part by Berkshire Hathaway).  They must know something.  It appears that outsiders are now putting a higher value on the home health industry than the public companies that, in the past, have been so dominant in home health M&A.

MERGER & ACQUISITION ACTIVITY FOR THE MONTH

M&A activity was quite brisk in December as transactions were completed in order to avoid any increases in 2013 capital gains….which did indeed occur.

Stoneridge Partners closes on six transactions in the month of December, providing sell-side advisory services.:

  • Recovery Homecare, a Palm Beach based Medicare agency with six locations throughout Florida was sold to a large home care and senior living provider.
  • Partners in Care, an award winning private duty agency located in North Carolina, sold to a large home care company.
  • Premier Care, an Ohio based Medicare agency, sold to a Central Ohio social services company.
  • Carefree Homecare, a leading Arizona based private duty agency sold to a national home care company.
  • An $11 million revenue Texas home health company sold to a financial buyer.  The name at this time must remain confidential.  (Hey, it really happened.)
  • The final closing occurred on the merger of Allied Health Care Corp. aka Broward Home Care with a large regional home care company.

Other acquisitions in the news:

Solamar Hospice was sold to Life Choice Hospice with an announced price of $85 million.

Homecare Advantage, a California based home health agency with revenue of approx. $2.5 million was sold to Kindred Healthcare.

We expect to see several other announcements of December sales, beating the capital gains increase deadline.

EBITDA Multiples: 

Multiples of EBITDA from earning results through the 3rd quarter 2012 with stock prices as of December 31, 2012.

Company Multiple of EBITDA
Almost Family 5.3
Amedisys 2.2
Gentiva 1.8

We would be interested in your comments. At the end of this column we have added a section for comments.  These can be sent anonymously.  The return email address can be left blank.  We are interested in what you have to say, or acquisitions that you know about.

WEBINAR:  At the end of this month we will be presenting a webinar on “Building the Value of a Home Health Agency”.  Watch your email for details.

Cartoon of the Month:

12_12_29 Cartoon2

 

And for additional musings on the state of homecare and what’s going on at Stoneridge Partners, visit our blog, which is updated regularly:stoneridgepartners.com/blog 

Links to Google Finance: Almost Family | Amedisys | Gentiva | LHC Group

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