* All data are as of the close of Wednesday, November 19, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
The Home Health Care industry - which specializes in hospice and home care for terminally ill patients, the elderly, and others in need of home nursing - is about to begin experiencing a steadily growing demand for its services. The baby-boomers (those born between 1945 and 1964, currently between 50 and 64 years of age) have begun entering their senior years, and as they bulge through their golden years, Home Health Care companies will be there to lend a helping hand.
But the demand for home care services won't grow quite as rapidly as might be expected, given our healthier eating habits, aversion to smoking and excessive sugar and alcohol intake, and the growing interest in exercise. People are living longer and healthier, and the boomers are pushing back the need for home nursing care further than previous generations ever have.
Investors in Home Health Care stocks, therefore, should not expect the industry to keep up with other healthcare stocks, as is clearly noted in the graph below spanning the recent economic recovery beginning in early 2009.
Where the broader market S&P 500 index [black] has gained some 204% and the SPDR Healthcare Sector ETF (NYSE: XLV) [blue] has gained 214%, of the three largest U.S. Home Health Care companies only the largest one - Chemed Corp. (NYSE: CHE) [beige] - has managed to keep up, rising a comparable 210%.
The other two - Amedisys Inc. (NASDAQ: AMED) [purple], and Gentiva Health Services Inc. (NASDAQ: GTIV) [orange] - have lagged behind miserably, netting just -4% and +45% respectively over the 5.5-year recovery. Not a very healthy record, although the last four to five months have seen strong gains from all three companies.
On an annualized basis, where the S&P has averaged 36% and XLV has averaged 37.76%, Chemed has averaged 37.06%, while Amedisys and Gentiva have averaged -0.71% and 7.94% per year.
Future growth for the Home Health Care industry as a whole looks pretty healthy for the most part, as tabled below where green indicates outperformance while yellow denotes underperformance.
Where the industry's earnings are expected to nearly match the broader market's earnings growth this quarter, they are seen underperforming next quarter. Things should pick up rather nicely for the industry in 2015, before slowing to a more modest outperformance over the next five years.
Zooming-in a little closer, the three largest U.S. companies in the industry are expected to grow at varying rates, with the smaller two playing catch-up with their older and richer brother.
Where Chemed's earnings are seen under-growing the broader market's average growth through 2015, Amedisys and Gentiva look poised to vastly outperform at some 5.52 to 33.68 times the S&P's growth rate over the current and next quarters, before settling down to less than 3.47 times the rate in 2015.
But over the next five years, all three are seen outgrowing the broader market's average earnings growth, with Amedisys continuing its superior performance throughout.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Gentiva posted the greatest revenue growth year-over-year while Amedisys posted the least with just a little shrinkage.
Since Amedisys' earnings growth is not available, the metric will not factor into the comparison. Yet it is worth noting Gentiva's and Chemed's impressive earnings growth rates.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Chemed operated with the widest profit and operating margins, while Amedisys and Gentiva contended with the narrowest, with both reporting negative profit margins denoting losses.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Chemed's management team delivered the greatest returns on assets where Amedisys' team delivered the least.
Since Gentiva's return on equity is not available, the metric will not factor into the comparison. Yet it is worth noting that Amedisys' team lost some shareholder equity.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Chemed provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Gentiva's DEPS over current stock price is lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Gentiva's stock is the cheapest relative to forward earnings, while Amedisys' stock is cheapest relative to 5-year PEG. At the overpriced end of the spectrum, Gentiva and Amedisys reciprocate the most overpriced standings.
Since Gentiva's price to company book value is not available, the metric will not factor into the comparison.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Amedisys offers the lowest percentages of earnings over current stock price for all time periods, while Chemed and Gentiva split the highest percentages between them.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Amedisys offers the greatest growth rate in all time periods. At the slow end of the scale, Chemed is projected to deliver the slowest growth near term and into 2015, while Gentiva is seen delivering it over the next five years.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Gentiva's stock offers the least upside potential and least downside risk, while Chemed's stock offers the greatest upside and Amedisys' offers the greatest downside.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Chemed is best recommended with 1 strong buy representing 20% of its 5 analysts, followed by Gentiva and Amedisys with 0 strong buy recommendations from 11 and 7 analysts respectively.
Since none received any buy recommendations, the metric will not factor into the comparison.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Chemed as it offers investors a lot more tender loving care, outperforming in 11 metrics and underperforming in 5 for a net score of +6, followed not far behind by Gentiva, outperforming in 10 metrics and underperforming in 8 for a net score of +2, with Amedisys falling out of bed as it outperforms in 6 metrics and underperforms in 16 for a net score of -10.
Where the Home Health Care industry is expected to outperform the S&P broader market negligibly this quarter, underperform moderately next quarter, outperform significantly in 2015, and outperform modestly beyond, the three largest U.S. companies in the space are expected to split perform, with Chemed offering the slowest earnings growth while Amedisys and Gentiva outgrow it as well as the broader market by astronomical rates.
Yet after taking all company fundamentals into account, Chemed Corp. promises to take better care of its investors given its lowest debt over market cap, widest profit and operating margins, highest return on assets, highest EBITDA over revenue, highest diluted earnings percentage over current stock price, highest dividend, best high price target, and most strong buy analyst recommendations - handily winning the Home Health Care industry competition.
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