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Himali Madye also contributed to this article.

Healthcare Services Group, Inc. (NASDAQ:HCSG) reported a 9% y/y growth in sales revenue, net to $160 M. Sales revenue growth is contributed by less than 6% increase in revenue from Housekeeping and 25% increase in Food service.

It recorded a 13% y/y growth in diluted EPS to $ 0.18 in 1Q FY09, beating market expectations and share price rose around 19% on April 15, 2009.
However, on a closer look one finds that in the QE March 09 quarter, the company's investment of its cash and cash equivalent assets in marketable securities has helped in increasing its investment income by twice the year-ago amount to $0.9 million. If one excludes the increase in investment income of $0.6 million, the comparable income before income taxes shows an increase of 10.1% only instead of reported increase of 12.8%.
Thus its investment return has added quite handsomely to its reported net income as well EPS growth.
Exhibit: Investment returns boosting overall performance

HCSG
QE Mar-08
QE Mar-09
Y/y % Chng
FYE Dec-07
FYE Dec-08
Y/y % Chng
Sales revenue, net
147.3
160.4
8.9%
577.7
602.7
4.3%
Operating income/(loss)
10.8
11.6
7.5%
44.1
41.9
-4.9%
Income from continuing
operations before taxes
11.2
12.6
12.8%
48.1
43.3
-10.0%
Net income/(loss)
6.9
7.7
12.8%
29.6
26.6
-10.0%
Weighted average shares
outstanding-Diluted
44.2
44.1
-0.3%
43.8
44.0
0.4%
EPS-Diluted
0.16
0.18
12.5%
0.67
0.60
-10.4%
Interest income / (expense), net
0.3
0.9
189.2%
4.0
1.3
-66.5%
Marketable securities, net
0
51.9
0.0
49.4
Cash and cash equivalents
97.0
44.5
-54.1%
92.5
37.5
-59.4%
Cash dividends per common share
0.13
0.17
30.8%
0.42
0.58
38.1%

Source: Gridstone Research

In its conference call, HCSG noted that it has exceeded its client retention target of 90% in 1Q09 and expects top-line growth of 10%-15% in FY09.
So, while its core business remains stable and growing, its future incremental growth is somewhat contingent on the outcome of how well it makes its investment decisions.
Business Description of HCSG: Healthcare Services Group, Inc. (HCSG) provides housekeeping, laundry, linen, facility maintenance and food services to the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. The company renders these services to approximately 2,200 facilities in 47 states as of September 30, 2008.
The company organizes its business into two reportable segments: housekeeping, laundry, linen and other services (Housekeeping), and food services (Food).
The services provided by the Housekeeping segment primarily consist of the cleaning, disinfecting and sanitizing of patient rooms and common areas of a client’s facility, as well as the laundering and processing of the personal clothing belonging to the facility’s patients. Services also include the laundering and processing of the bed linens, uniforms and other assorted linen items utilized by a client facility. The Housekeeping segment provides services in Canada, although the United States accounts for almost entirely all the revenue.
The Food segment develops a menu that meets the patient’s dietary needs, and includes the purchasing and preparation of the food for delivery to the patients. This segment provides services solely in the United States.
Healthcare Services Group provides its services primarily pursuant to full service agreements with clients. In such agreements, Healthcare Services Group is responsible for the management and hourly employees located at clients’ facilities. The company also provides services based on a management-only agreement for a very limited number of clients.
Healthcare Services Group operates three wholly-owned subsidiaries, HCSG Supply, Inc. (Supply), Huntingdon Holdings, Inc. (Huntingdon) and Summit. Supply purchases, warehouses and distributes the supplies and equipment used in providing the Housekeeping segment’s services. Huntingdon invests the company’s cash and cash equivalents.

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Source: Healthcare Services: Investment Returns Boost Overall Performance