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  • Almost Family: Almost Too Good To Overlook

    Almost Family is a company that, because of regulatory uncertainty surrounding government-funded healthcare, presents an attractive growth story at a compelling value. AFAM's move off of its multi-year support in the upper teens should signal to investors that the stock may be ready to run. A price performance comparison shows that AFAM tends to be the outperformer in both up and down markets amongst its peers in the home healthcare sector.

    We've developed a model that accounts for the knowns and unknowns surrounding Medicare reimbursement schedules and we attempt to value AFAM in a manner similar to a utility stock with government determined fixed reimbursement rates.

    Almost Family is the premiere player in the Home Health Care segment, directly providing services to sick and elderly individuals in their homes through their Visiting Nurse (VN) and Personal Care (PC) segments in regional clusters in the Southeast, Midwest, and Northeast. Our thesis on AFAM is the synthesis of a long-term trend (Baby Boomer aging), a best-in-breed operator, and a short-term catalyst in valuation compression. As Baby Boomers age and healthcare costs rise, the attractive of home healthcare will grow as the elderly prefer to age in their own homes and avoid costly hospital visits and nursing homes. Additionally, home healthcare presents a compelling value proposition, as its costs are significantly lower than the alternatives. The long-term solution to increasing healthcare costs will most certainly include home healthcare. [Source: Investor Presentation, pg 10]

    With AFAM, you can own the top public operator in the sector. In addition to organic growth of 58% over the previous 4 years, AFAM has acquired $156m in revenue over the same period [Source: Investor Presentation, page 7]. With an unused $125m on its revolver and an unlevered cap structure, the company is primed to continue its torrid pace in a very fragmented industry (the few other public competitors are only a few hundred million in MCAP) [From 10Q, Note 5]. Finally, the salience of regulatory concerns since the passage of Obamacare in 2010 have pushed down valuations in the entire industry. We believe the long-term opportunities from demographic trends and the fragmented industry outweigh the risks of reductions in Medicare reimbursements.

    It's our opinion that AFAM operates an ethically stringent business in a sometimes shady sector. Management sees themselves as 'Senior Advocates' with the goal of allowing seniors to 'Age in Place' in their homes [from Investor Presentation, pg. 13]. The company hires staff from local markets and positions senior management close to the ground operations. After last year's negative Wall Street Journal report, the Senate Finance Committee launched an investigation into alleged pressure that some home healthcare companies were placing on physicians to approve therapy utilization. AFAM has been cleared of any wrongdoing and the company's management continues to have a stellar reputation amongst the analyst community. Piper Jaffray: "Management has been very straightforward with the investment community over the last several years…To the best of our recollection, AFAM was the first company to talk about rate pressure and margin deterioration, which they continue to talk about going forward…We were not surprised when the Senate Finance Committee's report did not indicate that AFAM pushed for greater therapy utilization to drive higher revenue." [Thomson One, subscription-only]

    Recent stock performance has been impacted by the passage of the Patient Protection & Affordability Act and the Healthcare & Education Reconciliation Act of 2010, as well as the recent SNC investigation [10Q, pg 16]. New mandates requiring a face-to-face visit with a doctor prior to the provision of home healthcare services, as well as other documentation and justification requirements, have contributed to a short-term slowdown in admissions and treatment volumes.

    In order to project AFAM's performance going forward, it's important to understand the business model. The Prospective Payment System is Medicare's way of reimbursing healthcare providers. The government decides on the various adjustment items to the previous years' prices, and enacts them in a way similar to a utility. Most years the government updates the reimbursement price basket for inflation, adjusts for wage differentials based on geography, and reduces rates based on expectations of efficiency improvements. In the medium-term, the government will seek to lower Medicare reimbursement for home healthcare. While it isn't precisely clear how Medicare's stated reimbursement adjustments affect the rates AFAM receives, we believe that our model is a decent representation in the face of uncertainty. Below is a breakdown of our projected changes in Medicare reimbursements 2012 to 2017, assuming that the statutory outlines of the Affordable Care Act are implemented to their full extent. [10K, bottom pg 9]

    We used a 5-year DCF model to value the company's equity. AFAM's VN segment receives 90% of its revenues from Medicare, with the other 10% from insurance and private payers. Volume growth occurs as 'Episodes' increase. A standard episode is 60 days of treatment for a patient. Growth in AFAM's Medicare episodes has been about 38% per annum over the previous 3 years. The 'Revenue per Episode' metric reported in AFAM's SEC filings gives a proxy for price changes. The basic model for the VN segment takes our assumptions for changes in Medicare reimbursement, adjusts the Revenue per Episode input accordingly, and multiplies it by the Episode volume (computed using growth rate assumptions from historical performance). With an adjustment for the 10% of revenue not provided by Medicare, we get a topline Revenue number for the VN segment. A very similar model projects results for the PC segment, but uses Billable Hours as the volume measurement, and Revenue per Billable Hour as the proxy for price. Despite the fact that most reimbursement in the PC segment is provided by Medicaid (state-based equivalent to Medicare), we used the same reimbursement adjustments as those used for Medicare. We believe the pricing pressures affecting Medicare reimbursement will be mimicked in Medicaid over the next 5 years due to budgetary pressures facing states, and thus represent a decent proxy.

    With some relatively conservative assumptions about growth and margin efficiency, our Base Case of 13% volume growth in the VN segment and 5.5% growth in the PC segment should generate a $28 price target we believe will be realized in the next 12 months as the regulatory negativity clears. Our Bear Case assumes 8% and 4% growth respectively, and our Bull Case assumes 15% and 7% growth with an extra 0.5% in margin improvement. Returns are displayed above. In all three cases, volume growth and price reductions cause margins to compress over time with a bottoming near 2015-2017. The key point to the AFAM thesis is that volume growth will overcompensate for margin compression and continue to drive profitability going forward. With AFAM reporting today, it should be interesting to note investors' reactions.

    (Feel free to contact if interested in reviewing valuation model, the full DCF workout, or a more comprehensive presentation deck.)
    Post-Note: We have discussed the prospects of an LBO of a company like AFAM with stable, fairly predictable cash flows, a cap structure begging to be levered, and a depressed valuation. We'd love to hear people's thoughts one way or the other in the comments section.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: AFAM, Healthcare
    Feb 21 10:01 PM | Link | Comment!
  • Ominous Signs for Argentinean Debt
         Argentina is certainly not a stranger to problems with sovereign debt defaults and its precarious cash position in the face of $13 billion worth of debt coming due this year makes the situation potentially volatile in 2010. President Christina Fernández de Kirchner, struggling with falling popularity numbers, recently proposed that Argentina use a significant portion (approximately $6.5 bil of around $48 billion) of its foreign exchange reserves to help service the debt payments due to be made this year. Kirchner's proposal was rejected by the Central Bank President, Martín Redrado, whom Kirchner subsequently fired by decree. This is all typical of a country whose sovereign debt shouldn't be touched with a ten foot pole. The New York Times is reporting this morning that a federal judge has blocked the firing of Mr. Redrado and the Kirchner government seems prepared to appeal the decision. This conflict between the different branches of government is always disconcerting, yet it should be especially so considering Argentina's unique financial history. Unfortunately, Argentina has no EU to bail it out, nor would an IMF bailout go over particularly well in a country scared by the organization's history. 
         As of now, Argentina is not in imminent danger of default and will most likely be able to meet its obligations this year by one way or another.  Nevertheless, political warfare of this kind (not to mention the mockery of central bank independence) should be seen as a warning signal of further problems down the road. Mrs. Kirchner is proposing to use the reserves in order to avoid paying the estimated 15% rate that a sovereign debt investor would require to finance Argentine debt.  According to her, "anyone with an elementary education can understand" that this would be surrendering to speculators. Unfortunately, it appears Kirchner's elementary economic education has not taught her that those high rates are partly the result of actions just like her own.

    The author does not hold a position in Argentinean debt, nor should you.

    Disclosure: None
    Jan 11 2:15 AM | Link | Comment!
  • Goldman Sachs: 2010-2011 will see strong growth
         The raging debate between V-shapers and "new normal"ers continues with Goldman's release of its global growth projections for 2010-2011.  Interestingly, chief economist Jim O'Neill sees 4.4% and 4.5% growth in the next two years, seemingly dispelling any notion of a douple-dip recession.  To me, the most compelling part of Goldman's release is the discussion of a "low-inflation" environment marked by lower risk premiums. It seems difficult to imagine how we can get decent global growth without stoking the flames of higher oil prices and some level of inflation. Nevertheless, Goldman is maintaining faith in the Federal Reserve and its ability to successfully manage the transition from an artificially supported economy to a consumption/investment driven economy. Their projection of a lower-than-expected inflationary environment may bode ill for gold, though at this point the yellow metal seems to be focused only on central bank purchases. I think the burden remains on V-shapers like Goldman and JPM to show where growth is going to come from without government backing.  The meager productivity and demand increases we are seeing presently, both in the U.S. and China are taking place in the most liquid conditions the market has ever seen. Additionally, we should note that despite these rosy GDP expectations, there are several risks to simply going long equities.  First, the global growth story will most likely be one of 'haves' and 'have-nots' with the U.S., UK, and EU potentially growing at a slower rate. Investors should be selective in equity allocations.  Additionally, stock prices in most countries have already built in strong growth expectations and remain at historically above-average P/E valuations here in the U.S.  Thus, despite decent GDP growth, stocks may not be the best place to look.  
         Goldman offers some other interesting recommendations, including buying the pound against the kiwi and the Polish zloty against the yen.  We definitely like the second recommendation with Poland's growth prospects and the continued overvaluation of the yen.  Not so sure on the pound/kiwi trade, we are secular bears on the pound at this point. Nevertheless, the GBP/NZD pair seems to be trading back and forth within a broad range, giving credence to those who seem the pound gaining in 2010, if only in a countertrend rally.  

    Finally, in a somewhat bold call, Goldman suggests getting short Irish government CDS. Clearly, they are less worried about the issue of sovereign debt than some. Despite their confidence in governments, they do believe that anxiety will rise over Spain's ability to pay its debts and suggest getting long Spanish sovereign credit protection.  

    Disclosure: No positions held
    Dec 02 2:22 PM | Link | Comment!
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