December 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:

Anthony April  Encompass  JLD 6553
“The evolving health care delivery system is going to be characterized by larger, integrated health care providers offering a full range of services on a coordinated and comprehensive basis.”
– Jay Grinney, HealthSouth president and CEO, in discussing their recent proposed acquisition of Encompass.
“Opportunities were strong, so it was time to create that next transaction.”
– April Anthony, CEO and founder of Encompass.  A nice smile on her face with the announcement of the $750 million dollar sale!

 

The Stoneridge Partners Home Health Index (HH Index) Falls

Our HH Index has been fluctuating over the past few months which seems to paint a picture of a home health market with no clear direction.   While our Stoneridge Partners Home Health Index fell more than 3%, the S&P 500 rose 2.45%, which was a near 6% difference in one month alone.  All stocks in our index were down for the month.

The big news this past month was the blockbuster announcement that HealthSouth would acquire Encompass Home Health for $750 million.  Revenue for  2013  was reported as $256 million.  More on this later in the column.

The high for our HH Index was set in September, 2008 at 41.75.  We now rest at 23.99.

Here are this month’s results:

Company 11/30/14 10/31/14 Mos % Change YTD % Change Year Ago % Change
Almost Family 27.61 29.44 -6.22% -14.60% -1.04%
Amedisys 25.42 26.1 -2.61% +73.75% +56.14%
Gentiva* 19.41 19.70 -1.47% +56.41% +57.17%
LHC Group 23.51 24.35 -3.45% -2.20% -1.01%
HH Index 23.99 24.90 -3.65% +15.03% +19.52%
S&P 500 2067.56 2018.05 +2.45%% +11.86% +14.49%
Addus 23.08 19.87 +16.16% +2.81% -20.41%

*The purchase price of the Kindred-Gentiva transaction was set at $19.50 per share.

We continue to have a very mixed picture in stock prices, with both Almost Family and LHC Group down from one year ago, while Amedisys and Gentiva  show strong increases.

Addus, a public home care company not in our index, made a nice comeback after the release of their third quarter numbers, which showed a 21% increase in revenue.  Addus is not included in our index because the majority of their revenue does not come from Medicare reimbursement.

Below is a chart comparing Addus and our HH Index over the past two years.  Addus is primarily a non-Medicare company while the stocks in our index are primarily Medicare reimbursed. It might appear that Addus, as a non-Medicare company, had been lagging behind the primarily Medicare companies, however this past month they made a nice comeback.

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

PERCENT OF REVENUE & MULTIPLE OF EBITDA:

It is interesting to note the change over the past year in multiples of EBITDA and percentage of selling price to revenue.

Selling Price (Enterprise Value) as a Percent of Revenue. What a difference a year makes!

12/1/2014 12/1/2013
Almost Family 66% 59%
Amedisys 80% 40%
Gentiva 89% 71%
LHC Group 69% 64%
HH Index Average 76.0% 58.5%
Addus 81% 93%

Note that the purchase price of the Kindred-Gentiva transaction is approx. $1.8 billion.  Based on Gentiva’s second quarter annualized revenue of about $2 billion this works out to around 90% of revenue.  It appears that the other public companies are slowly catching up.

MULTIPLES OF EV/EBITDA. Think of this as price as a multiple of EBITDA.

12/1/2014 12/1/2013
Almost Family 14.04 9.15
Amedisys 18.54* 10.08
Gentiva 11.4 7.44
LHC Group 8.58 6.82
HH Index Average 13.1 8.37
Addus 12.06 13.19

The above calculations are based on selling price being defined as Enterprise Value (EV), with data provided by Capital IQ.   EV has been calculated based on stock prices November 30. Enterprise value is defined as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. EBITDA is calculated using methodology that may differ from that used by a company it is reporting.

* The spike in multiple of EBITDA for Amedisys may be a result of recently announced increased earnings. It seems that the stock trades on current earnings but the multiple of EBITDA is calculated on a trailing twelve months.

IN THE NEWS:

HealthSouth-Encompass:  On Monday, November 24th we were surprised to learn that HealthSouth will purchase Encompass Home Health for $750 million or about 9.5 times EBITDA, including a $40 million tax credit. Based in Birmingham, Alabama, HealthSouth (HLS-NYSE) operates inpatient rehabilitation facilities and generates over $2 billion in revenue.

Founded in 1998 and based in Dallas, Texas, Encompass is the fifth largest provider of Medicare-focused, skilled home health services in the United States. It operates in 140 locations across 13 states. Encompass is currently owned by Cressey & Company LP, a leading healthcare-focused private investment firm.

We noted last month that the Wall Street Journal had reported that Cressey was selling Encompass (and Hospice Compassus), so the sale itself was no surprise.  The surprise was the price.  As a percentage of revenue it set a new bar.

While Kindred is on contract to buy Gentiva for about one times revenue, HealthSouth is on contract to buy Encompass for what looks like over two times revenue.  Why the difference.  It’s all about the bottom line…always has been.  Both are being sold for around ten times EBITDA.

From the press releases it looks like HealthSouth will be keeping April Anthony and her management staff on board, which should make for a smooth transition.

Kindred-Gentiva: There has been very little news on the proposed Kindred purchase of Gentiva.  Closing, the last we heard, is scheduled for the first quarter of 2015.  Given the somewhat acrimonious press releases during the initial negotiations (poison pill, we will not be deterred, opportunistic, etc) one cannot help but wonder how that transition will go.

ALMOST FAMILY – TAKING A CLOSER LOOK

Third quarter numbers (000s) 

2014 2013 Difference % Change
Revenue
   Visiting Nurse* 97,845 67,455 +30,380 +45.0%
   Personal Care* 25,907 21,016 +4,891 +23.3%
     Total Rev 123,742 88,471 +35,271 +39.9%
Gross Profit
   Visiting Nurse 49,208 34,488 14,720 +42.7%
   % GP 50.3% 51.1% -0.8 -1.57%
  Personal Care 8,048 6,608 +1,440 +21.8%
   % GP 31.1% 31.4% -0.3 -0.96%
    Total GP 57,255 41,096 +16,159 +39.3%
    Total GP % 46.3% 46.5% -0.20 -0.43%
G&A* 49,891 37,308 12,583 +33.7%
Operating Income 7,364 3,788 3,576 +94.4%
Adjusted EBITDA 10,496 5,728 +4,768 +83.2%
Stock Price 9/30 27.17 19.43 +7.74 +39.8%

* Visitng Nurse Revenue consists primarily of Medicare skilled care.  Personal Care consists primarily of non-skilled community based programs.

For comparison purposes  approx. $34.0 million of their $35.3 million year over year increase in revenue was a result of their acquisition of SunCrest.  At the time of the acquisition it was announced that the annual revenue of SunCrest was $155 million, which works out to about $39 million per quarter.  At first this might look like a substantial decrease in SunCrest revenue post acquisition, however given that there was a great deal of over-lap in certain markets like Florida and that they only paid about 50% of revenue, this looks pretty good.

GRAPHS: This first graph shows the HH Index compared to the actual prices of the individual companies that make up the chart through November, 2014.

(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 13 years, going back to November, 2002. It has been quite a ride.

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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 November, 2014.

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

MERGER & ACQUISITION ACTIVITY:

SOLD….by Stoneridge Partners:

Dallas, Texas: Epic Health Services, Inc., a leading provider of home health services, and Nurses to Go, Inc., a prominent provider of pediatric and adult private duty and home health care services in Missouri, have announced the closing of a definitive agreement under which Epic has acquired Nurses to Go.  Cory Mertz, one of our partners, provided sell-side advisory services.

Other Transactions:

Providence, Rhode Island:  Nautic Paartners, LLC announced that it has partnered with management to acquire All Metro Health Care Services, Inc. (“All Metro”). All Metro is a leading provider of home and community based services in New York, New Jersey and Florida. All Metro was founded in 1955 and is headquartered in Lynbrook, NY.

Lafayette, Louisiana: LHC Group (NASDAQ:LHCG) announced that it has entered into a three party home health joint venture with Southeast Alabama Medical Center (SAMC) and Troy Regional Medical Center in the Certificate of Need (CON) state of Alabama. The service area includes seven counties with a population of 415,000.

HEARD ON THE STREET:

Last month we noted that, in addition to Encompass, Cressey & Company was also planning on selling another home health portfolio company, Hospice Compassus, Inc.   It now appears that that transaction is going forward.

We have heard that Formation Capital, along with the Audax Group, Health Care REIT, Inc., National Hospice Holdings and Safanad, Ltd have formed a holding company, FTC Holdings, to acquire Hospice Compassus.

COMPANIES EXCLUSIVELY LISTED FOR SALE BY STONERIDGE:

  • New Jersey – $4 million private duty agency.  Primary payor is Medicaid, and the agency enjoys very good relationships with many referral sources.  Stoneridge file #S-6700
  • Jacksonville, FL – $2 million revenue Medicare home care agency based in Jacksonville.  Well established with strong management team in place.  Diverse referral base.  Stoneridge file S-4159
  • New Jersey – $4 million hospice serving southern New Jersey, well-established with a great reputation for quality care.  Stoneridge file S-1070
  • Massachusetts – Five year old agency selling the Medicare certified provider number only, with no patients. Available immediately.  Stoneridge file S-7050
  • Utah – $10 million home health and hospice provider with multiple office locations. Good platform or add-on opportunity, motivated seller.  Stoneridge file S-2262
  • Florida – $2.8 million Medicare certified agency serving District 3. Solid operational team in place. 95% Medicare.  Stoneridge file S-9000
  • New Mexico – $2.3 million Medicare provider serving the Roswell area. Clean surveys.  Stoneridge file S-5295
  • Arizona – $2 million hospice located in large Metropolitan area.  Clean surveys and no CAP issues.  Stoneridge file S-6210.
  • Arizona – very low census Medicare agency in the Phoenix metro area.  Accredited.  Stoneridge file #S-2010
  •  Michigan – $2.2 million revenue behavioral health company providing Medicaid waiver services in group homes. Great relationship with referral sources.  Stoneridge file #S-1066.
  • llinois – Profitable $5.5 million revenue Medicare home care and hospice serving the northern Chicago MSA.  Mature management team in place, a diverse referral base and strong outcomes — exceeding state and national averages on 15 of 22 quality measures as measured by Medicare’s “home health compare”.  Stoneridge file S-5288. On Contract
  • Ohio– $2.2 million revenue run rate diversified agency in central Ohio.  Private pay and both Medicare & Medicaid certified to serve both dual eligible and managed care populations.  Excellent outcomes.  Stoneridge file S-5276.
  • West Texas – $3.5 million Medicare agency established in 1995.  Stoneridge file S-5279.
  • Ohio – $2.5 million Medicare agency in Columbus area, 75% traditional Medicare, long history of quality care.  Stoneridge file S-5232.
  • Florida – Orlando area Medicare agency with about $900,000 revenue.  Stoneridge file S-2540.  ON CONTRACT
  • Ohio – $11 million Ohio Medicaid Provider.  Experienced management team will stay with new owner.  Stoneridge file S-5283. ON CONTRACT
  • Georgia – Medicaid provider with over $6 million in revenue, 40% gross margin, and approx. $800K in EBITDA.  Stoneridge file S-5263.  SOLD
  • Texas – Multi-location private duty home care agency, $3.4 million revenue with a consistent 40% gross profit produces 15% EBITDA.   A quality agency evidenced by their latest survey with zero deficiencies,  Stoneridge file S-4250.
  • West Virginia – Medicare home care agency in CON state.  $3 million in revenue, growing with new CON territories being developed.  Strong management team.  Stoneridge file S-5261.
  • Texas – $3.5 million Medicare & Medicaid provider.  40% pediatric services, Gross margin of 48% and adjusted EBITDA of $400,000.  Stoneridge file S-5231.
  • Florida – Diversified Medicare/Medicaid Home Care Agency with revenue of approx. $4 million.  Professionally operated with excellent financial records.  Stoneridge file S-5280.
  • California – $8.3 Million Private Duty and Medicare Provider.  Predominately a private duty provider, this agency also operates a small, but significant, Medicare operation, making it a unique opportunity.  Owner will consider selling the business lines separately.  Stoneridge file S-3098.
  • California – Los Angeles Medicare, Medi-Cal and private pay skilled care provider.  They have a long history in the local community and top-notch management that is willing to stay with a new owner.  Stoneridge file S-3000.
  • California – $5 million Hospice agency east of Los Angeles, profitable with clean surveys.  Stoneridge file S-3037
  • New Mexico – Private pay home care and care management agency with annual revenue approaching $1 million.  Stoneridge file S-5450
  • California – $3 million Santa Barbara Medicare agency, very motivated seller invites all offers.  Stoneridge file S-3098M

To see more home care agencies and hospices exclusively listed for sale by Stoneridge Partners go to the following link:Agencies for Sale

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.

A favorite cartoon from the New Yorker

http://www.technologyinvestor.com/wp-content/uploads/2014/11/sheep.jpg

MORE:  For more cartoons and 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 –  800-218-3944

Previous editions of this monthly newsletter can be searched for below.    Links to Google Finance: Almost Family | Amedisys | Gentiva | LHC Group