Trailing P/E: 27.39 FAIL
Forward P/E: 21.35 FAIL
PEG Ratio (5 yr expected): 3.68 FAIL
Beta: 0.98 PASS
LONG-TERM DEBT/ NET INCOME (<3)? 0 PASS
Low CAPEX for current operations maintenance? PASS
Operating margin (10 year average) = 5.95% FAIL
Net margin (10 year average) = 4.14% FAIL
EPS Growth (Last 5 Years) (>10%): 10.82% PASS
Forward EPS Long Term Growth (3-5 Yrs) (>10%): 6.76% FAIL
Revenue Growth (Last 5 Years): 11.80% PASS
Cash Flow Growth Rate (Last 5 Years): 11.71% PASS
The company has ROE > 12-15% over last 10 years? 18.66% PASS
The company has ROA > 7% over last 10 years? 12.48% PASS
The company has ROIC > 15% over last 10 years? 18.21% PASS.
Sales has increased consistently over years? PASS
Cash Flow has increased consistently years? NO
+ Company has good long term compounding track record with growing EPS, equity supported by growing revenue. 10,000$ invested in HCSG in Jan 2006 would be $52,55$ in May 2019 with dividends reinvested , CAGR = 13.25%. The CAGR of SPY during the same period = 8.78%.
+ Good growth aspects with high ROE, ROA, ROIC, and increasing Sales, Equity, EPS at reasonable rate. The business requires fairly low Capital Expenditures.
+ Company has been rising its dividend for 15 years.
+ Since the slump after releasing 2018 December-quarter results. Insiders has been net buyers of the stock.
+ Thomas Gayner (Markel Asset Management, MKL) has been averaging down this stock from Q2 2018. Tom is one of my favorite investors together with Chuck Akre, John Rogers, etc.
+ This kind of stock basically does not pass my normal valuation metrics, but it has rarely been cheap, and at least, now, it is not expensive.
+ The business is cyclical. The operating and net margins are low, which makes me uncomfortable.
INSIGHTS FROM VALUE LINE (by Robert M. Greene February 22, 2019)
- Healthcare Services stock slumped after the release of 2018 December-quarter results. Current valuation is fair compared to historical valuation of the stock itself. Earnings jumped 56% year over year, to $0.42 a share, with a low tax rate and a sizable benefit from favorable workers compensation trends helping share net to beat our estimate by a nickel. The top line, though, left something to be desired, as HCSG posted a negative comparison for the first time in more than three decades. The slight dip, about 1% year over year, was mostly related to contract restructuring in the housekeeping & laundry segment that reduced quarterly revenues about $10 million.
- We are cutting our estimates for 2019. Notably, the restructuring of a large dining & nutrition account late last year means that the revenue decline will likely be more pronounced in the early stages of 2019. In all, full-year revenues now appear likely to edge past $2 billion, about flat with 2018, but down $150 million from our previous call. On the positive side, the bottom-line drag from the lost business figures to be relatively modest, though we are still reducing our earnings estimate by a dime per share, to $1.55.
- The company has been stepping up its management training efforts. This heightened focus on developing excess management capacity, which is typically a precursor to signing up new accounts, is likely to continue through midyear. Assuming success on this initiative, the top line should begin to rebound later in 2019. And longer term, HCSG remains confident that demand for its housekeeping and dining services can support a return to high single-digit or low double-digit revenue growth.
- Healthcare Services has been tightening its payment terms. Monthly billing had been the norm, but more than 40% of the customer base now has been transitioned to weekly or semiweekly. This shift to an accelerated payment model figures to continue in 2019 and should result in improved cash collections.
- These shares offer good total return potential to 2022-2024. Over time, HCSG should put the recent lackluster operating performance behind it and return to the steady top- and bottom-line growth that has characterized much of its history.
- 2022-24 PROJECTIONS Price Gain Ann’l Total ReturnHigh 75 (+90%) 19%Low 55 (+40%) 10%
CONCLUSION: The stock price is now actually already in my buy range. However, since it is in a down trend, I am not going to fight the market. I am interested in initializing a small speculative position by buying my first share of HCSG through Robinhood account. Then, I would wait for whenever the share price recovers back to about 36-37$ or crosses the 200D MA. I am okay not catching the bottom.
UPDATES FROM VALUE LINE (by Robert M. Greene May 22, 2019)
- Healthcare Services Group stock has slumped to its lowest levels in several years. Its share price has fallen more than 15% in the past three months alone, as news of an SEC investigation into the company’s earnings calculations and reporting practices followed by worse than-expected March-quarter results have further shaken investors’ confidence inthis long-time market favorite.
- A challenging operating environment has been taking a toll on some customers. Late in 2018, for instance, the company chose to make contract modifications to a large dining and nutrition account, and earlier this year HCSG ended its relationship with a housekeeping and laundry client in California. These changes have weighed on revenues, which slumped 4% sequentially in the March period. The falloff in earnings was even more pronounced, as the financial difficulties of two customers, including the aforementioned one in California, necessitated an $18 million increase in accounts receivables reserves. Overall, share net fell short of our first-quarter call by $0.26, and the prospect of sluggish revenues over the balance of 2019 has prompted us to trim another $0.14 from our full-year estimate, which now stands at $1.15.
- The top line probably won’t improve much in the near term. Rather, HCSG will likely continue to emphasize building up its management pipeline, while efforts to replace lost business figure to proceed rather cautiously over the rest of 2019. On the positive side, management indicates that demand for its services remains strong, while operating margins, exclusive of accounts receivable writeoffs, are rebounding back to the levels seen before the influx of a sizable amount of new business in 2017. With these favorable trends in place, a return to top- and bottom-line growth seems likely for 2020, barring difficulties building up its management ranks or further financial setbacks with existing customers.
- Patience may well prove rewarding here. While the recent operating challenges are unsettling, we suspect the attractive growth opportunities available in HCSG’s markets will continue to support a premium P/E multiple to 2022-2024.
- 2022-24 PROJECTIONS Price Gain Ann’l Total ReturnHigh 65 (+95%) 20%Low 50 (+50%) 13%
Disclosure: I am/we are long HCSG.
Additional disclosure: I am not an investment professional. Please do your own due diligence.