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The Ensign Group, Inc. (ENSG) is a very successful company, with an equally promising future. The company has grown in revenues and earnings quite consistently over the last decade. It benefits from its key competitive advantages, and a unique business model. In addition, the stock is cheap when viewed in terms of its revenue growth. Long term investors are advised to seriously consider adding this stock to their portfolio.

Important Factors For Analysis:

Business Model:

The Ensign Group operates in an industry with growing demand and modestly falling supply. Ensign has leveraged this increase in demand by increasing its size through acquisitions and building on its competitive advantages. Due to its high quality care and future growth opportunities, Ensign was listed in Forbes' "America's Best Small companies" list.

Ensign is a provider of skilled nursing and rehabilitative care services. The organizational structure of the company is based upon local leadership. The company allows the local leadership at each facility to make important decisions, and allowing for superior clinical outcomes. Such an organizational structure is unique in the industry.

Ensign's greatest competitive advantage is its high quality care. The company has achieved a reputation for cost-effective care and services. This helps the company attract patients that need more intensive and medically complex care and result in relatively higher reimbursement rates.

In addition, the company attracts outstanding business and clinical leaders. With broad local control, these local leaders are able to meet the needs of the patients and residents, and they need not wait for permission from the corporate. The company encourages a caring leadership team, and daily participation in the clinical and operational improvement of the local businesses. Such focus on excellence puts the company at an advantage against many other companies in the industry.

Ensign is an acquisition driven business and makes such acquisitions in a disciplined manner. The company only undertakes those acquisitions where the businesses can become clinically sound and can contribute to the financial performance. In addition, the company has developed an ability to incorporate the newly acquired businesses into their organizational culture. This allows for lesser disruption to patients and the facility operating staff.

Cash Reserves:

The current ratio of Ensign is unimpressive. It is at 1.38, down from 1.79 in 2008. The company is aggressively making newer acquisitions, and running through its cash, in the process. Even though the company has handsome operating cash flows, a major portion of these acquisitions has been sponsored by an increase in debt.

The long term debt to equity ratio has fallen from .37 in 2008 to .61 in 2012. Even though the ratio seems good enough in isolation, Ensign must keep a check on the leverage. If it were to do so, it would have to sacrifice a bit on the volume of acquisitions in the coming years.

Stock Price:

The market is bullish on the company. PE ratio (ttm) is 45.84. Even though the PE ratio seems high, the company is selling for cheap. This is because the company's income in 2012 was reduced due to an unusual expense(government inquiry) of $15 million. As regards the same, Ensign registered another expense of $33 million in the first quarter of 2013. The matter was settled in 2013. However, this caused a loss in the first quarter of 2013 and will reduce the earnings significantly in 2013. This enquiry had no impact on the business model of the company and that will result in a huge earnings result in 2014.


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Since the number of shares has not changed much at the company, the absence of the government inquiry(which cost $15 million in 2012) would have increased the EPS to around 2.3 in 2012, and given us a PE ratio of about 15. The current stock price is $36.

This makes the stock relatively cheap, especially in light of its good business model.

Risks:

A loss of its competitive advantage is the biggest risk the company faces. Ensign must continue to maintain the discipline of profitably transforming its purchases. In addition, it must maintain its high standards of service. A loss in any of the competitive advantages could make the company less attractive.

Conclusion:

The stock of Ensign is relatively cheap and is a "BUY" for long term investors. The company has a good business model, and operates in a growing industry. The revenues of the company have consistently risen over the last 10 years and can be expected to rise for a long time. The company must, however, keep an eye on its Balance Sheet and maintain healthy cash reserves. An improvement in the working capital would alleviate any fears of liquidity problems for the company.

Source: The Ensign Group: A Great Opportunity