Seeking Alpha
, Real Money Pro (12 clicks)
Value, growth at reasonable price, contrarian, newsletter provider
Profile| Send Message|
( followers)  

Almost Family (NDQ:AFAM) – Sep. 14, 2009 $28.38

52-week range: $14.91 (Mar. 9, 2009) - $53.85 (Nov. 10, 2008)

Almost Family is a provider of home health services. Service locations are in Florida, Kentucky, Connecticut, New Jersey, Ohio, Massachusetts, Alabama, Missouri, Illinois, Pennsylvania and Indiana. They operate in two segments: Visiting Nurse (VN) and Personal Care (PC). The company is compensated by Medicare, Medicaid, other third party payers and private pay. Government entities provide about 92% of revenues. The Visiting Nurse segment provides a range of Medicare-certified services to patients in need of recuperative care, following a period of hospitalization or care from an inpatient facility. The company’s Personal Care segment provides services in patients' homes on an as-needed, hourly, or live-in basis.

Home health care has been a great growth area as the aging of America continues. Earnings have risen from a split-adjusted $0.27 /share in 2003 to $2.58 /share in the trailing twelve months ended June 30th. Last October AFAM was ranked 24th in Forbes magazine’s listing of “The Best Small Companies in America” up from its #77 ranking in 2007. Almost Family was added to the S&P SmallCap 600 on February 20, 2009.

Here are the split-adjusted per share numbers since 2003 as reported by Value Line:

Year

Sales

C/F

EPS

B/V

Avg. P/E

2003

18.91

0.85

0.27

2.67

13.3x

2004

18.73

0.87

0.31

2.62

14.1x

2005

15.76

0.81

0.52

4.20

13.8x

2006

17.96

1.03

0.80

5.43

14.1x

2007

23.89

1.56

1.40

6.30

14.1x

2008

26.00

2.17

2.18

11.59

14.1x

Growth has come organically and through acquisitions of other similar healthcare companies. AFAM recently authorized issuance of 1.6 million new shares in a secondary offering (through J. P. Morgan Chase) to fund future capital spending and acquisitions.

The balance sheet is healthy with total debt at just 22% of capital and with almost nothing coming due within five years.

Earnings per share were sharply in this year’s first half and Zacks now sees full year 2008 earnings of $2.84 versus 2007’s $2.18. That puts Almost Family’s multiple at < 10.2x current year estimates. That’s the lowest P/E on these shares in more than a decade.

A rebound to a (still lower than typical) twelve times projections would see these shares at $33.60 by early next year. Is that out of line to expect? Hardly. AFAM shares peaked at $53.85 in November last year after their excellent third quarter report and were as high as $47.90 since the start of 2009. With record sales and earnings on tap that 433.60 target looks very conservative.

Here’s a nice buy/write combination that offers very good returns out to February 2010 with a break-even well below today’s price.

Cash Outlay

Cash Inflow

Buy 1000 AFAM @ $28.38 /share

$28,380

Sell 10 Feb. $30 Calls @ $2.95 /share

$2,950

Sell 10 Feb. $30 Puts @ $4.70 /share

$4,700

Net Cash Out-of-Pocket

$20,730

If AFAM shares rise to at least $30 (+ 5.7%) by Feb. 19, 2010:

  • The $30 calls will be exercised.
  • You will sell your shares for $30,000.
  • The $30 puts will expire worthless.
  • You will have no further option obligations.
  • You will hold no shares and $30,000 in cash.

That’s a best-case scenario net profit of $9,270/$20,730 = 44.7% achieved over only 5.25 months on shares that only needed to go up by 5.7% or better.

What’s the risk?

If AFAM shares finish below $30 on Feb. 19, 2010:

  • The $30 calls will expire worthless.
  • The $30 puts will be exercised.
  • You will be forced to buy an additional 1000 AFAM.
  • You will need to lay out another $30,000 in cash.
  • You will have no further option obligations.
  • You will end up with 2000 AFAM shares.

What’s the break-even on the whole trade?

On the original 1000 shares it’s their $28.38 purchase price less the $2.95 /share call premium = $25.43 /share.

On the ‘put’ shares it’s the $30 strike price less the $4.70 /share put premium = $25.30 /share.

Your overall break-even would be $25.37 /share.

Almost Family could fall by as much as $3.00 /share (-10.6%) without causing a loss on this trade.

Disclosure: Author is long AFAM shares and short AFAM options.

Source: Almost Family: Well Positioned for Demographic Growth