Nursing Home Care Industry Is A Solid Investment

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Includes: BKD, GEN, KND
by: Harold Goldmeier
Summary

The nation is aging, and the trend is to improve services to people of all ages with special needs. Nursing home companies will benefit.

Profits are staggering, and the nursing home companies have a long list of add-on sales for supplemental services through subsidiaries they control. Big profits are realized in equity valuations.

The industry depends a lot on government reimbursements, and cultural factors can affect growth, but three stocks stand out worth considering.

The care of infirm people in special residential facilities who cannot be cared for at home is a multi-billion dollar industry. The 50 largest firms account for 20% of the revenues the industry generates. Government reimbursements through Medicaid and Medicare, fee-for-service payments from states, and a mix of private insurance and self-pay are the primary sources of revenues.

Their primary services are suitable living quarters, meals, bathing facilities, etc. Personal attention to individual needs 24/7, skilled nursing, laundry, personal hygiene, transportation to personal physicians and hospitals, convalescence and therapies, drug maintenance, dental, mental health, dietary, and more are typically available sometimes at additional cost. Some services are part of the overall reimbursements while many others like hospice and home care, physical and occupational therapy generate additional revenues from company billings. One owner of multiple nursing homes I personally know employs 1,500 PTs and OTs through another company who service residents in his homes and facilities owned by competitors. There are drug-dispensing companies with lucrative contracts specializing in servicing nursing home residents. The nursing home owners might own companies providing linens, food service, and doctor visits that generate other revenue streams.

The nursing home industry serves people of all ages. There are highly specialized services in specially designed facilities for pediatric care and disabled children. Some homes will confine the elderly patients with most of their mental capacities to the lower floors, and patients with mental health problems on the upper floors. There are retirement centers for the self-sufficient, and assisted living facilities for those with minimal care needs.

Privatization blossomed when media exposed scandals in patient care and criminal operating procedures in state-owned facilities. A guaranteed steady income stream from government reimbursements made the industry profitable attracting private investors. A shortage of beds for the aging population and people with special needs commix with cultural shifts like two-income families and childless homes. Most recently, the trend to reduce the length of hospital stays is a boon to privatization of nursing homes with patients stopping off for rehab before returning home.

Reports about low levels of staffing and inadequate quality of care charges pillory the industry deters some investors from for-profit nursing home stocks. Publicly-traded companies can ill afford bad government survey reports and bad press. Most complaints are directed at privately-held companies.

The Centers for Disease Control and Prevention estimate there are nearly 16,000 nursing homes with nearly 2 million beds housing 1.4 million residents in the U.S. 68% are privately owned. The American Association of Retired Persons (AARP) pegs the average cost for nursing home care is $50,000 per year and climbing. Many times, the value of a nursing home company is not solely based on the revenues it generates, but on the spiraling equity in beds. In the late 1990s, a bed might sell for $19,000 in a well-groomed, high-end facility. In today's market accounting for locations and client populations, a bed can sell for upwards of $75,000. Some companies are expanding globally into countries like Ireland, Israel, and Japan with significant aging populations and shifts in government reimbursement ideologies. In England, there is a buy-to-let trend. Individual rooms in a care facility are bought by investors and rented to an occupant until they are released or die. Some investors are getting 10% ROI and capital growth. Profits in this industry have been called "staggering."

Kindred Healthcare (NYSE:KND) operates in more than 2,700 facilities in more than 47 states. Its $1.8b market cap and annual revenues topping $7b has Fortune including KND on the list of Most Admired Healthcare Companies for six years. Investors receive a 2.1 dividend yield. The stock is currently trading down about 20% at $22.71 from its 52-weeks high of $26.8 and a low of $16.84. On May 6, 2015, KND reported beating estimates by nine cents. KND bought a large healthcare services provider in 2014 for a deal valued at $1.8b. Barclays has set a price target of $36 for KND.

Genesis Healthcare (NYSE:GEN) beat revenue estimates by three cents this last reporting quarter. The stock is down to $6.39 to near its low of $5.75 and from a high of $9.32. The market cap is $972m, but shares traded are generally light. GEN has about 49,000 beds in over 400 facilities. Like many in the industry, GEN is a holding company with subsidiaries in rehab and other services. GEN is a post-acute care provider with more than 500 skilled nursing and living centers in 34 states. Deutsche Bank has a HOLD rating on GEN with a price target of $8. I like it because it might be a target in the M&A consolidation trend rippling through the healthcare industry.

Off track a bit from nursing homes is Brookdale Senior Living (NYSE:BKD). BKD appears to be a solid investment opportunity. The company specializes in independent and assisted living facilities. It also operates home healthcare services, hospice, skilled nursing and therapy centers. The stock trades at $37.35 per share near its high despite missing revenue estimates for the last quarter by $1.31 or $20m on revenues of $1.25b (+67.3% year to year), but the company's earnings of 63 cents per share for the quarter beat expectations by four cents. It has a $7b market cap. BKD operates more than 600 retirement communities employing more than 50,000.

I especially like the company's stable, experienced management team and its extensive real estate holdings. The CEO is with it nearly a decade, holding other positions in the company. Other officers are also decade-long members of the management team. Analysts have a target share price for BKD between $41 and $44. The moving average over fifty days is $37. I am cautious about BKD, because insider trading is heavy on the sell side the last couple of years.

Every investor needs do their own due diligence, but as an industry, there is potential for growth to serve seniors and the nation's desire to better care for those with special needs. Culture and economic changes require fundamental analyses be a part of any due diligence. States with liquidity problems, government bean counters demanding payment reforms, and delayed retirement trends must be considered.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.