With Baby Boomers moving into retirement, and eventually, advanced age, assisted living centers will be inundated with clients. This presents a unique opportunity for us investors.
Here is an overview of some of the major nursing home companies:
Brookdale Senior Living, Inc. (BKD) has the largest market cap out of all of these companies, at $3.34 billion. Their stock price has risen 7% since January 1, 2013. Short interest is at roughly 4 million shares, with an estimated 3.6 days to cover. The company also enjoys an A+ rating with the BBB.
Brookdale has a history of expanding quickly and hiring plenty of staff to care for clients. However, their earnings per share have missed estimates for 4 straight quarters. The stated reason for this is due to "heavy investment in turning around under-performing facilities." They have not paid out a dividend since 2008, and it will probably be a few years before they do so again. If their investment in improving their facilities goes according to plan, this company will be in a very strong position in a few years.
Emeritus Corporation (ESC) is the other big player in this market. There are 700,000 shares of short interest right now, with an estimated 4 days to cover. Short interest has been on a steady decline since early 2012.
Emeritus Corp's earnings are worse than BKD's. They seem to be reversing course by using their second public offering to pay off debt. However, this will only cover $600 million of their $4 billion in debt. That's right, a scary $4 billion in debt to a market cap of $1.23 billion. I like BKD's fundamentals much more, and am skeptical about this corporation's path to profitability.
Five Star Quality Care, Inc. (FVE) has a meager market cap of 307M, but they are actually earning money, unlike the big guys. While they have yet to pay out a dividend, their technicals are good. The company carries less than $40 million in debt, and short interest is minimal. Their last purchase was very successful, as earnings show, and occupancy ratings are at roughly 87.5%, a rise from last quarter.
Capital Senior Living Corporation (CSU) has $400 million in debt, low short interest, no dividend, and a market cap of $750 million. This company oozes mediocrity out of many of their statistics. Nonetheless, CSU has enjoyed a huge run-up from less than $10 last year to nearly $30 today. Their occupancy is extremely high at 95%. While their client base is growing, the company has announced no expansion plans. Despite this occupancy growth, the company has still failed to keep earnings from declining. Unless revenues are stabilized, this stock is overvalued.
There are a few other minor players that are frankly not worth mentioning. All of these companies are underwhelming, especially considering their market has more and more consumers every year. While their balance sheets and earnings will improve over the next few years, there is both a lack of expansion and a lack of profitability throughout.
The better investment alternative
Addus Homecare Corporation (ADUS): This company is a little different from the ones mentioned above, and is by far my favorite. Instead of moving the senior into a care center, the company does their best to keep seniors independent by coming to their homes to care for them. This service will be very popular among the notoriously independent baby boomers, who generally believe it's better to burn out than to fade away.
This business philosophy also makes economic sense. ADUS's innovative model lends itself to large growth with minimal overhead, since large campuses do not need to be built for seniors to live in. This allows them to pass some savings on to the consumer, making them a threat to the standard nursing home model.
Their earnings are a fantastic $0.59 per share, putting their P/E at 16. Short interest is next to non-existent, with less than a day's volume in shares held short. Because this is a relatively nascent corporation, no dividends have been announced yet. With only $25 million in debt to their market cap of $126 million, the company has a healthy balance sheet. I love underdogs like this with a growth model in mind.
Consumers like household healthcare, with 79% of consumers saying they will "definitely" recommend this type of service to a friend. The market is going to need this alternative, as construction of retirement facilities is falling. Some seniors who are willing to move into a retirement home will need the services of companies like Addus because there will simply be no room for them.
BioScrip, Inc. (BIOS): Think of this corporation as a hybrid of the standard assisted living corporation and Addus, above. They offer both in-home care and hospice care.
The company has a decent balance sheet as well. Their liabilities add up to $350 million and their market cap is a respectable $713 million. The number that caught my eye was last year's P/E ratio of 10.78. If they can maintain their earnings, this company will be a great one to own.
Perhaps the hybrid approach will lead to the greatest profits? After all, customers who had a good experience with in-home care will be more likely to use the same company for hospice care should it become necessary.
Unfortunately, not even the home-care companies really jump out at me as a strong buy, as the entire sector has enjoyed a run-up in price since summer 2012 and thus are not significantly undervalued. If you are a value investor, as I am, consider waiting until summer to buy in. Unfortunately, no ETF exists yet for assisted living corporations, but keep an eye out for one if ETFs are your cup of tea.
Any long position initiated in any assisted living corporation should be held for at a year minimum to see a reasonable return. Frankly, I think 10+ years would be an ideal amount of time to give these securities to mature, as boomers begin to use these services en masse.