January 1st Update

[pl_alertbox type=”info”] 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. [/pl_alertbox]

Quote of the Month:

CMS’ own analysis shows that 43 percent of all providers will be underwater because of this rule.  In NAHC’s own analysis, the total number of providers forced to operate either at or below their costs of care was over 70 percent of all providers. Medicare’s rate rebasing formula is designed to pay less than the cost of care…..” Bill Dombi, NAHC’s Vice President for Law

The Stoneridge Partners Home Health Index (HH Index) ends the year up 31.5%.

Our Index ended the year at 20.85, a high for the year, and also its highest point since July of 2011.  Yet, as anyone with a retirement account knows, the market as a whole also did very well this year, with the S&P 500 up 29.6%.

For the first time in several years the HH Index did better for the year than the stock market in general.  Great news for sure, but, with so many home health agencies struggling with lower reimbursement, audits and other problematic issues, what does this news mean?  More on that later in the column.

Our Stoneridge Partners Home Health Index (HH Index) is now up over 30% for the year, and all stocks in our index are up.

The high for our HH Index was set in September, 2008 at 41.75.   By December of 2011 it had dropped to 11.77.

Here are the results:

Company

12/31/13

% Month

% Year

Almost Family 32.33 15.88% 59.58%
Amedisys 14.63 -10.14% 29.35%
Gentiva 12.41 0.49% 23.48%
LHC Group 24.04 1.22% 10.33%
Home Health Index 20.85 3.90% 31.54%
S&P 500 1848.36 2.35% 29.60%
Addus 22.45 -22.59% 213.99%

For those stocks in our HH Index, clearly the winner is Almost Family with an increase of close to 60%.  All of that increase took place over just the last few months with their acquisition of Suncrest.

Addus however is clearly the winner with over a 200% increase.   In March of this year they completed the sale of their Medicare business to LHC Group.  At that time their stock was selling for about $9.   It is now over $22.

They are now focusing on the  dual eligible Medicare/Medicaid population.  Clearly the stock market likes their game plan.  We do note however that their stock was down this past month 22%.

We continue to track Addus; however, because they have very little Medicare revenue, they are not included in our index.

 GRAPHS: Just take a look at that yellow line of Almost Family

This first graph shows the HH Index compared to the actual prices of the individual companies that make up the chart through December, 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) [iframe_loader src=”http://stoneridgepartners.com/hhi/hhi.html” width=”604″ height=”450″ scrolling=”no”]

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 for over 11 years,  going back to November, 2002.  It has been quite a ride. [iframe_loader src=”http://stoneridgepartners.com/hhi/hhi-vs-sp.html” height=”450″ scrolling=”no”]

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, 2013. [iframe_loader src=”http://stoneridgepartners.com/hhi/hhi-12.html” height=”450″ scrolling=”no”]

[iframe_loader src=”http://stoneridgepartners.com/hhi/hhi-addus.html” width=”604″ height=”450″ scrolling=”no”]

ANNUAL SUMMARY

We thought it might be interesting to look back on the significant transactions of 2013, and then our outlook for 2014.

LHC Group – Addus:  The first significant transaction of 2013  has already been discussed….the sale of the home health service line of Addus HomeCare to LHC Group.  In a portion of the locations that were sold, Addus retained 10% ownership. Revenue on the locations that were sold was $36.7 million and the purchase price was $20 million.   Addus stock has since taken a dramatic jump.

Almost Family – Indiana Home Care Network:  In July Almost Family announced their acquisition of  the Medicare-certified home health agencies owned by Indiana Home Care Network for $12.5M.

KK&R – Amedisys: On August 9th it was announced that private equity giant KK&R had taken a stake of over 8% in Amedisys.   That day AMED 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.  On January 1 it was 14.63.  We think that this story will continue to have legs in 2014.

Gentiva-Harden:  In September it was announced that Gentiva was going to buy the home health and hospice segment of Harden Healthcare.  Harden, with revenues of $476 million, was being purchased for $408.8 million (about 86% of revenue).  The logic of this acquisition…..about 40% of Harden’s revenue came from Hospice with most of the remaining revenue coming from community care programs such as Medicaid waiver programs.  After this acquisition Gentiva’s stock showed little change.

Kindred-Senior Home Care:   In October Kindred announced their purchase of Senior Home Care at a price of $95 million (66% of revenue).  Senior Homecare generates approximately $143 million in revenue and operates 47 locations.

Almost Family-Suncrest:  Also in October Almost Family announced their acquisition of Suncrest, a home health company with revenues in 2012 of approximately $150 million for a purchase price of $75.5 million.  This appears to be an ideal transaction for Almost Family, bringing in new geographic clusters in Tennessee, Georgia and Mississippi, and significantly expanding their current clusters in Florida, the Northeast and the Midwest.  After this announcement their stock has jumped from the 19 to 20 range to over 32.

FORECAST

While November’s announcement by CMS of their final rule gave us the bad news that Medicare home care  reimbursement will continue to decline for the next few years, the price of the HH Index stocks went up.

Then last month we reported results from the third quarter for the four public companies in our HH Index.  In total, year vs year, revenue dropped 6.4%, gross profit dropped 8.9% and operating income dropped 46.9%, yet in spite of these poor results, our HH Index was, at that time up 11.2%. Thanks in a large part to Almost Family, the HH Index is now up 31.5%.

At first this was puzzling.  With all of the key operating numbers down, and future reimbursement down, why were the stock prices going up?  At first we thought this was simply an anomaly, but we now  believe that this is the result of finally getting some clarity.  Budgets, forecasts and modeling can now be done based on reality.  We can put our Ouija board back in the closet.

The stage may now be set for massive industry consolidation which should favor the big companies…..those that can spread overhead over multiple office, and can afford superior software and marketing.

Next Year:

Q. What do you call an economist with a forecast?

A. Wrong.

Over the last decade various private equity groups made large investments in Medicare home care.  We believe that this may be coming to an end, and, in fact, we may see many private equity firms exiting home care.

This should favor the public companies, and other large companies that are not dependent on private equity.  We expect to see the stocks of these public companies continue to increase, and we expect to see several very large transactions.

However, for the smaller privately held companies, they are going to continue to face hurricane force headwinds, with lower reimbursement, audits and other government intrusion.

Yet in spite of these problematic issues there continues to be a very good market for privately held home care agencies.  Senior housing, hospitals, public companies, large platform companies of private equity, physician practices and others continue to compete for well run local agencies, and prices, although not what they were a couple of years ago, continue to remain strong.

Prediction: The HH Index, which ended this year at 20.85, will be at 23.0 on December 31, 2014.

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.

Company EV as % of Revenue
Almost Family 78%
Amedisys 38%
Gentiva 70%
LHC Group 66%
Addus 84%

MULTIPLES OF EBITDA 

Company Multiple of EV/EBITDA
Almost Family 12.11
Amedisys 9.46
Gentiva 7.28
LHC Group 6.40
Addus 11.25

The above calculations are based on Enterprise Value (EV), with data provided by Capital IQ.  EV has been calculated based on stock prices December 31.  EBITDA is calculated using methodology that may differ from that used by a company it is reporting.

Do you know of any acquisitions that have taken place?  We would be interested in your comments.  At the top of this column is a “Contact Tab” with 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.

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 

From Don Cummins, Publisher of “The Home Health Index”  don@stoneridgepartners.com

Previous editions of this monthly newsletter can be searched for at the bottom of this page.

 

Cartoon of the Month

 

12_12_29 Cartoon2

Favorites from The New Yorker

http://www.technologyinvestor.com/wp-content/uploads/2013/12/LastSmoker.jpg

 http://www.technologyinvestor.com/wp-content/uploads/2013/04/GeneralPeterssen.jpg

 

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