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LHCG - A Solid, Decently Managed Consolidator

|Includes: LHC Group (LHCG)

U.S. Home Healthcare Agencies (HHA) provide in-home skilled nursing and other home health care services, such as physical therapy. HHAs are licensed by the state, but must adhere to federal regulations as well. Home health must be prescribed by a physician. Medicare is the principal provider of home health care in the U.S. and covers a substantial part of home health care costs.

Founded in 1994 and IPOed in 2005, LHCG:NASDAQ is one of my favorite players of this sector. They have grown from its home Louisiana state to serve 80.000+ people across the States, but at more reasonable rates than its peers and using internally generated funds only.

The visibility on "secure" cash flows from Medicare and strong financial position (virtually all debt issued to pay for the legal settlement has been repaid) grant rich multiples to LHCG: it trades at 12 times 2012 earnings (company guidance is 1.45 - 1.65) and 7 times modified EBITDA. This does not look cheap! A DCF to equity model including the most recent guidance given by the company and my view on inorganic growth yields a scarce Internal Rate of Return of 10.3%, even if a high terminal PE is used (x12).

LHCG is a decently-managed consolidator in a sector that will certainly not attract investors requiring some allure to their portfolio. I do not think it is cheap enough to justify a position at current levels. Check out the complete report at

Disclosure: I am long LHCG.