September 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:

“The Medicare proposed rule could result in nearly $100 billion in total cuts to the home health benefit.”                                                                                                                               

From an analysis released through the combined efforts of NAHC, VNA of America and The Partnership for Quality Home Health Care.

The Stoneridge Partners Home Health Index Hits a Two Year High!

In June, after CMS issued their onerous proposal,  our Stoneridge Partners Home Health Index (HH Index) crashed.  It charged back in July, up 8.5% and now in August it’s up another 6%.   Not since July of 2011 have we been at this level.  Meanwhile the overall market turned in a poor performance, with the S&P 500 down over 3%, ending  the month at about where it was last May (sell in may and go away).

But before we get too carried away with this seemingly good news it must be pointed out that this increase was primarily the result of one stock’s  big jump.  On August 9th it was announced that private equity giant KK&R had taken a stake of over 8% in Amedisys.   That day the stock jumped from 14.62 to 17.90….over 22% with 3.5 million shares traded.  In terms of our Home Health Index, that news was huge!  Consider that at the close of June, Amedisys stock hit a multi-year low of under $10.  At that time we ruminated that it might be a good buy.

For the last few months we have been including Addus in our monthly tracking; however, because they have very little Medicare revenue, they are not included in our index.  Addus is however a home care company to watch, and, for the past year, they have had outstanding stock market performance.  Here are the monthly results:

Company Price 8/31/13 Change in %,  Month Change in %,  YTD Price 7/31/12 Change in %, year
Almost Family 18.87 -1.36% –6.86% 22.08 -14.54%
Amedisys 16.29 30.22% 44.03% 14.08 15.70%
Gentiva 11.47 6.80% 14.13% 10.98 4.46%
LHC Group 22.63 -1.35% 3.85% 17.40 30.06%
Home Health Index 17.32 6.03% 9.23% 16.14 7.31%
S&P 500 1632.97 -3.13% 14.50% 1406.58 16.1%
Addus 21.18 7.84% 196.22% 4.87 334.91%

As you can see, most of this month’s increase came from Amedisys, although Gentiva too had a good month.  Both Almost Family and LHC Group were down.   Almost Family is the only stock that is down both YTD and from one year ago.  All others are up.

Regarding stock market performance over the past year, clearly the big news continues to be Addus HealthCare.  Talk about a stock on a tear….up over 300% from one year ago.

The high for our HH Index was set in September, 2008 at 41.75, and then, within five months it dropped to $21.  It now sits at $17.32.  As a comparison, since 2008, the S&P 500 is up about 75%.

GRAPHS:  This first graph shows the HH Index compared to the actual prices of the individual companies that make up the chart through August, 2013.

(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 going back to November, 2002.

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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 August, 2013.

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By the Numbers:

Now that all of the earnings reports have been released for the second quarter, we thought it might be interesting to look at some totals.  Below is the total revenue, gross profit and operating income for all of the four companies that are included in our home health index:  Almost Family, Amedisys, Gentiva and LHC Group.

Second Quarter Totals (000s) 2013 2012 + or – 2011 + or –
Revenue 980,644 1,034,151 (53,507) 1,073,401 (92,757)
Gross Profit 442,263 472,164 (29,901) 513,066 (70,803)
    Gross Profit % 45.1% 45.6% -0.5% 47.8% -2.7%
Operating Income 53,597 76,101 (22,404) 89,868 (36,271)
 Home Health Index on June 30 16.33 14.67 +1.66 24.88 -8.55

Summary….Over the last two years:

1.  Revenue for the quarter dropped about $93 million or 8.6%.

2.  Gross profit dollars dropped about $71 million or 13.8%.

3.  Gross profit percentage dropped from 47.8% to 45.1% down 5.6%

4.  As a result, operating income dropped dramatically, down $36 million, over 40%.

5.  Stock prices as measured by our Home Health Index dropped 34%.

These sad results appear to be tied directly to the decrease in Medicare reimbursement….and, with the new proposal from CMS, the future does not look better.

On the bright side however, over the last year, even with revenue and operating income down substantially, the stock prices, as measured by our HH Index, are up….over 11%.  What does that tell us?

Certainly another bright spot appears to be the investment of KK&R in Amedisys.  As a giant private equity firm, they certainly do not have a reputation for making mistakes.  It makes one wonder what they know?  Further, how active are they going to be, and if they do become active, will this usher in a change in management?

Selling Price as a Percent of Revenue:  For many years the selling price of good Medicare agencies was generalized at about 100% of revenue.  Clearly that is no longer the case.  These public companies are now selling for considerably less.  The following percentages are based on Enterprise Value (EV), with data provided by Capital IQ.

Company EV as % of Revenue
Almost Family 42%
Amedisys 42%
Gentiva 65%
LHC Group 66%
Addus 80%

Multiples of EBITDA which are based on Enterprise Value (EV).  Data provided by Capital IQ.

Company Multiple of EV/EBITDA
Almost Family 5.66
Amedisys 7.82
Gentiva 6.37
LHC Group 6.83
Addus 10.50

MERGER & ACQUISITION ACTIVITY –

  • Kindred Healthcare signed a definitive agreement to acquire Western Reserve Senior Care, a Cleveland, Ohio physician practice specializing in home care.  Financial terms were not disclosed.
  • We just finished the sale of a $16 million Medicare agency in the southeast.  Cory Mertz, one of our partners, provided advisory services to the seller.   At this time the name of the company is confidential.

Do you know of any acquisitions that have taken place?  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.

Presentation:  On September 10th in Columbus, Ohio we will be giving our presentation titled “Selling a Home Health Agency….how to successfully value, structure and execute a merger or sale of a home health agency”.  Go to our home page for further information.

MORE:  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

Cartoon of the Month, from The New Yorker

http://www.technologyinvestor.com/wp-content/uploads/2013/09/reinvent.jpg

 

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