The Ensign Group: Stable Medical Investment

During difficult economic times, companies with stable cash flows and strong earnings often attract the interest of savvy investors. The Ensign Group, Inc. (ENSG) certainly fits the bill with its portfolio of medical care facilities across the Western United States. Not only does the company have a stable and profitable business, but it also enjoys a strong balance sheet which allows the company to make strategic acquisitions in a challenging market.

At the beginning of this week, the company announced two new acquisitions which brings its portfolio to 65 facilities. (Of the 65, 33 are owned and the remaining 32 are leased - 9 of the leased properties have purchase options.) This announcement comes on the heels of a late October acquisition of 4 facilities in Texas and California. Management expects these purchases to be immediately accretive giving shareholders a stronger income stream over the coming years.

While organic growth has been impressive, Ensign’s management team seems especially adept at finding strong acquisitions to increase its portfolio. Challenging economic times may create more opportunity as competitors could have trouble with debt levels and find themselves in a position where they must sell. After raising capital during the 2007 IPO, Ensign is sitting on a large amount of cash ($56.4 million at the end of the third quarter) which it can use to take advantage of these situations. The company has long-term debt of $60 million. This is certainly manageable given the strong cash flow and adequate cash reserves.

Much of the company’s revenue comes from Medicare or Medicaid reimbursements. This should likely provide stability and even growth as the new administration will likely increase the coverage assumed by these programs. The impressive third quarter numbers were actually negatively impacted because of a delay in California’s budget. Reimbursements from California should have been sorted out and applied retroactively which will positively affect fourth quarter numbers.

Investors will be anxiously awaiting the full year earnings announcement in the coming weeks. It would appear that traders would be wise to own the stock before this announcement as the stock could gap higher on any positive news. Specifically, investors will be watching for guidance as the company lays out the road map for 2009. With the stock currently trading at about 13 times current earnings, and stable growth a proven trend, it appears the value is strong and investors could have a strong return over the coming months.

ENSG Notes

Disclosure: Author has no position in ENSG.

Comments

[Mike_B:]

Just a few more pieces to the puzzle...

I disagree with your assertion that ENSG's dependence on Medicare & Medicaid reimbursement brings security to the company. Take a look at the Medi-CAL situation (California's budget may not last through 1Q'09), compare it with what portion of ENSG's portfolio is in California, then think about what happened in '08 when reimbursements were held up in the state. There's no reason why that won't be repeated this year.

Also, ENSG's stock will be held back by an ongoing DOJ investigation into the some of company's Medicare reimbursement claims. The company doesn't claim to be worried, but you need to consider the potential impact if the investigations uncovers wrongdoing.

Jan 06 10:07 AM

[Mick B.:]

Think of all the aging baby boomers. Dr. Kevorkian would suggest you hedge your bet with shares of Soylent Green. Bottom line is...these people will have to be put someplace in their golden years. That service will be needed whether the economy is doing well or not.
In at 9. and enjoying what I hope will be a long ride.

Jan 10 08:59 PM