Tuesday, April 9, 2019

A Current AIM Small Cap Equity Holding: LHC Group (LHCG, $106.93): “Paving the Path for Value-Based Healthcare” By: Luke Smrek, AIM Student at Marquette University

LHC Group (LHCG, $106.93): “Paving the Path for Value-Based Healthcare”
By: Luke Smrek, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


LHC Group (NASDAQ: LHCG) provides post-acute health care services to patients in their home nursing agencies, hospice agencies, community-based service agencies, and long-term acute care hospitals. LHC Group was founded in 1994 and is headquartered in Lafayette, Louisiana.

Through the acquisition of Almost Family in March 2018, LHCG significantly increased their market exposure in the home health care services from 5% to 10%. This acquisition will be immediately accretive to earnings with about $25 million in cost synergies.
• Consolidated net service revenue for the year ended December 31, 2018 $1.8 billion compared to $1.1 billion for the same period in 2017 which is an increase of $747.4 million, or 70.3%. This revenue growth is 2018 was primarily due to acquisitions during 2018 and an increase in same store growth by 36.3%.

• LHC Group has a long track record of successfully partnering with hospitals and health systems. They currently have 76 joint venture partnerships, which includes 336 hospitals. The federal and state governments are committed to increasing home health utilization, as it is a lower cost option compared with skilled nursing and other post-acute care providers. As a result, the firm has a significant pipeline of joint ventures, which is expected to accelerate revenue growth.

• LHC Group is a leader in home health and with the industry moving towards a value-based payment system, the company is well positioned to lead this change. Organic growth continues to be fed by industry leading quality scores and co-location strategy.

Key points:

Organic growth in home health admissions and revenue and growth in hospice revenue continue to drive earnings growth. For the year ended December 31st, the home health segment increased by 8.5% and 6.6% in the last three months. The hospice segment grew by 3.4% over the last year and is continuing its steady growth.

Key growth drivers remain in place for LHC Group as the they continue to maintain disciplined capital allocation with new joint ventures and other mergers and acquisitions. Improving patient quality care, lowering costs, and improving satisfaction scores is what will continue to drive the company.

For the year 2019, expected annual growth in earnings is 27.7% which is well above the industry average for healthcare of 13.2%. LHCG’s revenue growth is expected to be 9.6% for the year which is above the healthcare industry average of 7.2%. These metrics show that LHC Group will continue with steady and high earnings growth while exceeding the industry in earnings and revenue growth.

LHCG has not efficiently used shareholders’ funds in the last year with a return on equity of 5% which is well below the industry average of 14.8%. The company will look to improve on this by widening their operating margins on sales, specifically by reducing operating expenses.

What has the stock done lately?

The AIM equity fund purchased LHC Group on October 15th, 2018 at a price of $92.30 and since then it has risen to a high of $115.54 on March 22nd, 2019. The stock is currently at $106.93 which is 7.50% below the high. Since the initial date of purchase, the stock has increased by 13.68% to its current price. Similarly, over the last three months LHC Group has seen an increase in price by 14.06%. The company will look to continue their strong performance over the next few quarters.

Past Year Performance: 

LHCG has increased in stock price the last year by 13.90%. Recent performance in earnings and revenue indicate that 2019 will continue to be a strong year. Shareholder return over the last year was 74.9% which is well above the U.S healthcare industry return of 4.9%. These figures show that future cash flows for 2019 will continue to increase.

Source: FactSet

My Takeaway:

LHC Group has performed well over the last year with their increasing focus on reducing costs, improving patient care quality, and satisfaction scores. As the healthcare industry looks to increase earnings and revenue by 13.2% and 7.2% respectively, LHCG is well above those marks and will look to gain market share in 2019 as an industry leader. LHC Group is continually looking for growth from existing and potential joint venture partners and acquisitions. Continuing to make strategic moves could keep the company growing at a fast pace, and leaves room for the company to take big strides in the home health care industry.

Source: FactSet