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.
