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Small Cap Play: ENSG

|Includes: The Ensign Group, Inc. (ENSG)

Ensign Group Inc. (NASDAQ:  ENSG) is in what will be one of the fastest growing industries over the next 30 years, long-term healthcare.  Despite fears that Washington is going to slash federal healthcare spending with a machete, the stock has been sold off to a point where it seems attractive again.

Washington is not going to slash services completely to this industry and deep cuts will be met with severe pushback.  The only areas they will be able to make cuts is in eliminating inefficiencies (i.e. not paying for duplicate tests when only one is needed or not having to see 2-3 doctors just to see a specialist).  For the most part, most federal funding will remain.  If cuts somehow go deeper, the healthcare providers will be able to cut expenses for a while before it significantly impacts the bottom line.

This provides tremendous potential for companies like ENSG that are trying to grow their operations in anticipation of this influx in the elderly population.  Even with squeezed margins due to future Medicare reform, the increase in patient volume should help ENSG maintain a decent rate of growth.  Currently, the company is opening up new facilities and also growing by acquiring smaller competitors.

My absolute pricing models say that the company’s intrinsic price is $26.50 per share.  The company’s ratios are as follows:  P/E of 10.32, forward P/E of 10.9, P/B of 1.9, P/S 0.7, and a P/CF of 6.6.  A quick look at the financial health of the company shows a current ratio of 1.64 and a debt/equity of 0.54.  Shareholders of this company should keep a close eye on developing healthcare spending reform.  This is the largest risk to the company.  However, I believe return potential outweighs risk potential at these market prices. 

Disclosure: I have no positions in any stocks mentioned, and do not intended on initiating a long position over the next 72 hours.

Disclaimer: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.