January 1st Update

Quote of the Month:

There are more than 12,000 home health agencies (Medicare certified) in the U.S., and about 95% of them have less than $5 million in annual revenue.  This fragmented market creates acquisition opportunities.” 

    –  HealthSouth in a press release regarding their acquisition of Encompass Home Health

Happy New Year from Stoneridge Partners and the Home Health Index!

The Stoneridge Partners Home Health Index (HH Index) is updated monthly and measures the performance of these four publicly traded home health companies, all listed on the NASDAQ:
Almost Family (AFAM)
LHC Group (LHCG)
Gentiva (GTIV)
Amedisys (AMED)

The Stoneridge Partners Home Health Index (HH Index) ends 2014 on another strong note.

Our HH Index ended the year with a flurry, up over 13% for the month and up over 30% for the year.  This is the second straight year with over 30% gains.  Over the past two years our HH Index has risen 71%.   Who saw that coming? Back in November, 2012 we were hit with the bad news regarding the onerous Medicare re-basing.  Doom and gloom was forecast by many experts.  What we have seen is just the opposite.

Not since May of 2011 have we been at this level.  The all-time high for our HH Index was set in September, 2008 at 41.75.  Our low since then was set in October, 2011 at 11.65.  Two years ago we were at 15.85.  We now rest at 27.13.  Its been quite a ride, but it sure is nice to see the current trend.  More on this later in this column, with a look back at our forecast from one year ago and our forecast for 2015.

Here are the results for the past two years:

Company 12/31/14 12/31/13 12/31/2012        2 yr change
Almost Family 28.95 32.33 20.26 +42.7%
Amedisys 29.35 14.63 11.31 +159.5%
Gentiva* 19.05 12.41 10.05 +89.5%
LHC Group 31.18 24.04 21.79 +43.6%
HH Index 27.13 20.85 15.85 +71.1%
S&P 500 2058.90 1848.36 1426.19 +44.4%
Addus 24.27 22.45 7.15 +239.4%

*The purchase price of the Kindred-Gentiva transaction is set at $19.50 per share, and is due to close on Feb. 2.

With the exception of Almost Family, all stocks are up for the year, and all stocks are up nicely over two years.  Addus leads the way, up 239%, with most of that gain coming after the sale of the company’s Medicare division.  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.  This shows a very nice trend line for our HH Index.

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

PERCENT OF REVENUE & MULTIPLE OF EBITDA:

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

1/1/2015 1/1/2014
Almost Family 69% 78%
Amedisys 85% 38%
Gentiva 89% 70%
LHC Group 82% 66%
HH Index Average 81% 63%
Addus 83% 84%

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 catching up.

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

1/1/2015 1/1/2014
Almost Family 14.68 12.11
Amedisys 19.64* 9.46
Gentiva 11.32 7.28
LHC Group 10.16 6.40
HH Index Average 13.95 8.81
Addus 12.45 11.25

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 December 31. 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.

See It To Believe It

This first graph 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.  And what a great two year trend.

[iframe_loader src=”http://stoneridgepartners.com/hhi/hhi-vs-sp.html” height=”450″ scrolling=”no”]
This second 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, 2014.[iframe_loader src=”http://stoneridgepartners.com/hhi/hhi-12.html” height=”450″ scrolling=”no”]

2014 Recap

HealthSouth-Encompass Transaction Closes: 

We were surprised in November to learn about HealthSouth’s plans to purchase Encompass Home Health for $750 million, approximately 9.5 times estimated 2015 EBITDA. This transaction closed at the end of December, and, because of the price, may be the most significant transaction of the year.

We can’t help but speculate that this sale may be the reason for December’s nice increase in our HH Index.  If Encompass can sell for two times revenue, why are the public companies selling for less than one times revenue?

The following comes from the presentation on the HealthSouth web site:

“This acquisition creates enhanced positioning to participate in integrated delivery and value-based payment models.”

“As healthcare moves towards value based medicine, Encompass’ competitive advantages position it to be the leading partner to health systems, payors, and ACO’s.”

Kindred Pursues Gentiva

Kindred’s purchase of Gentiva is now scheduled to close on February 2nd.  At $2.3 billion it creates the largest operator of home health agencies and hospices in the world.  It is estimated that this will increase Kindred’s EBITDA from 7.6% to 9.1%.

To fund this transaction, Kindred recently closed on $1.35 billion in unsecured notes, issued in two tranches of $750 million at 8% due in 2020, and 600 million at 8.75% due in 2023.  This new debt is on top of the already $1.5 billion in debt Kindred was carrying on their Sept. 30 balance sheet, hence the attractive interest rates.

“Kindred will now be able to deliver services across the full spectrum of care, from transitional inpatient hospitalization to post-acute rehab and skilled nursing services to home health and hospice care.”

Graham Holdings-Residential Healthcare

We feel that one of the more interesting transactions from 2014 was the Graham Holdings acquisition of a majority interest in the Michigan-based Residential Healthcare Group. This acquisition follows their purchase in Oct, 2012 of a majority stake in Celtic Healthcare, which provides home care services in Pennsylvania and Maryland.

This transaction was part our group’s ongoing strategy of acquiring companies with demonstrated earnings potential and strong management teams attracted to our long-term investment horizon.”

Note the words “long term”.  Graham Holdings was created from the sale of the Washington Post, of which Warren Buffet is an investor.  These are clearly very intelligent people who continue to make large investments in home care.  We take that as a big positive.

LHC Group – Deaconess HomeCare

LHC Group completed their acquisition of Deaconess HomeCare, which added 32 agencies in four states, with annual revenues of approx. $72 million.

Amedisys

In one of the largest transactions from 2013, KK&R took an 8% stake in Amedisys.  In February, 2014 founder and CEO William Borne stepped down.  On March 27 it was announced that Nathaniel Zikha, a member of KK&R, was appointed to Amedisys’ Board of Directors.

We noted at that time that with change there is often great opportunity.  Looking in our rear view mirror, we all should have taken action.  Amedisys stock at that time was  selling for around $14.  It closed 2014 at 29.14.

Last month Paul B. Kusserow was named their new CEO.  In his recent past, Mr. Kusserow was the Senior VP of Development at Humana, where he oversaw their acquisition of the home care company SeniorBridge.   To read the press release:   Paul Kusserow

Predictions Looking Back:

I  enjoyed looking back to my column from one year ago where I made a few predictions for 2014.

First prediction:   Our HH Index would close the year at 23, which would have been a 15% increase. I underestimated.  We ended the year at 27.13 for over a 30% increase.

Second prediction:  We expect to see the stocks of these public companies continue to increase.  That one proved correct.

Third prediction:  We expect to see several very large transactions.  The acquisitions mentioned above show this prediction also proved to be correct.

Predictions Looking Forward:

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

A. Wrong.

At StoneridgePartners we are very optimistic about the future of home health care, and believe that, given the large investments very intelligent people are making in home health, the market will continue to see increases in valuations of quality companies.  We also believe that the trends from 2014 will continue in 2015.  Unless there is a stock market meltdown we predict that our HH Index will continue its rise.

Some more predictions for 2015:

  • My prediction is that the public companies will continue to increase in price and will be selling for a minimum of 100% of revenue.
  • Our index will end the year at 33.
  • There will be at least two very sizable transactions, as large integrated healthcare companies expand their home health presence.
  • Skilled nursing companies will continue to expand into home health.
  • We do not think that a merger of Amedisys and Almost Family will take place.
  • After years of increases, the total number of Medicare home health agencies will decrease.

Merger & Acquisition Activity:

Sold by Stoneridge Partners:

DOWNERS GROVE, Ill, Jan. 5, 2015 /PRNewswire/ — Addus HomeCare Corporation (NASDAQ:  ADUS), a comprehensive provider of home and community-based services that primarily are social in nature, provided in the home and focused on the dual eligible population, today announced that the Company has acquired Priority Home Health Care, Inc., effective January 1, 2015. Headquartered in Cleveland, Ohio, Priority operates six offices in the Cleveland, Akron and Columbus areas, which are expected to produce revenues of approximately $11 million for the year ended December 31, 2014. Addus anticipates the transaction to be accretive to earnings in 2015.

Brian Bruenderman, one of our partners, provided sell-side advisory services.

Other Transactions, The Ensign Group Has Been Busy:

San Diego, The Ensign Group, Inc. (Nasdaq:ENSG), the parent company of the Ensign™ Group of skilled nursing, rehabilitative care services, home health and hospice care, home care, assisted living, and urgent care companies, announced today that it acquired Guardian Angel Hospice, a Medicare and Medi-Cal certified hospice agency located in San Diego, California.   Ensign-Guardian

Phoenix, The Ensign Group, Inc. (Nasdaq:ENSG), the parent company of the Ensign™ group of skilled nursing, rehabilitative care services, home health, home care, hospice care, assisted living and urgent care companies, announced today that it had acquired Alarys Home Health, a Medicare and Medicaid certified home health agency located in Scottsdale, Arizona. The acquisition was effective January 1. Ensign – Alarys

Lubbock, TX — The Ensign Group, Inc. (Nasdaq:ENSG), the parent company of the Ensign™ group of skilled nursing, rehabilitative care services, home health, home care, hospice care, assisted living and urgent care companies, announced today that it acquired Hospice of the South Plains located in Lubbock, Texas and serving patients throughout the South Plains area of Northwest Texas.  The acquisition was effective December 31, 2015.      Ensign- Hospice of South Plains

Exclusively Listed for Sale by Stoneridge:

  • Pennsylvania – $7 million plus, Medicaid provider with multiple locations in southeastern Pennsylvania. Well-run, profitable agency with great year over year growth and reputation for quality services.  Stoneridge file #S-8000
  • 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
  • Northern Utah- Opportunity to establish a Medicare home health agency in northern Utah, including Davis, Salt Lake, Utah, and Weber counties. Extremely low census in anticipation of sale.  Stoneridge file #S-2262A
  • 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 – Approximately $3.5 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.
  • Florida – Opportunity to establish a Medicare home health agency in District 8. CHAP accredited with offices in Fort Myers and Naples.  Stoneridge file S-4600.
  • 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 – $2.5 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. SOLD
  • Florida – Diversified Medicare/Medicaid Home Care Agency with revenue of approx. $4 million.  Professionally operated with excellent financial records.  Stoneridge file S-5280.
  • 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

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.

Appropriate New Year’s resolution from Calvin & Hobbs

15_01 new Year

 

 

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