Monday, November 28, 2016

A current AIM Fund holding: The Ensign Group (ENSG) by John O'Connor. “Ensign Aims to Rehab Their Performance"

The Ensign Group, Inc. (ENSG, $21.93): “The Ensign Group Aims to Rehabilitate Earnings Headed into the Fourth Quarter” 
By: John O’Connor, 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

·         The Ensign Group, Inc. (NASDAQ: ENSG) owns over 200 independent operating subsidiaries that provide a variety of skilled nursing and rehabilitative care services. These services are for both long-term residents and short-stay rehabilitation patients. Ensign’s subsidiaries include 186 rehabilitative and healthcare facilities, 17 urgent care clinics, 14 hospice companies, and 18 home health agencies. A majority of the subsidiaries are located in the Western and Southern United States; while 21 facilities were recently added in Wisconsin and South Carolina. ENSG was founded in 1999 and is headquartered in Mission Viejo, CA

·         ESNG missed on earnings in the third quarter, reporting $0.32 actual EPS vs. consensus $0.34. Management attributed the effect on earnings to the large number of facilities that they currently have in the transition phase after recently being acquired. Occupancy rates typically take a temporary hit when a new facility is acquired.

·         Ensign management recently reassured investors that the recent softness in occupancy rates were not indicative of rates across the entire portfolio. Rather, these lower rates were limited to only specific geographies.

·         Management recently reaffirmed guidance for FY16 with annual revenue expected to be in the $1.625 to $1.660 Billion range, and EPS expected to be between $1.35 and $1.42.

·         A recent announcement of a 2.4% increase in Medicare rates were implemented on October 1st, which will result in a positive impact on ENSG’s topline growth moving forward.

·         Ensign also recently acquired Riverbend Post Acute Rehabilitation. Riverbend is a 152-bed skilled nursing facility located in Kansas City, Kansas; a market in which ENSG has been growing their presence.

Key Points: Ensign’s primary strategy is their consolidation strategy which focuses on acquiring lower quality facilities and transitioning them into 4 or 5 star quality facilities. With that being said, they have continued to grow the company via series of acquisitions. So far this year they have acquired 20+ different facilities and operations to add to their portfolio. The most recently announced acquisition was that of Riverbend Post Acute Rehabilitation, a 152-bed skilled nursing facilities in Kansas City, Kansas. 

Facility leaders have been focusing much of their efforts on integrating 74 recently acquired skilled nursing and assisted living operations into the larger Ensign portfolio. Ensign relies on these leaders to successfully turn around the recently acquired underperforming facilities. These facilities are ultimately transitioned into 4 or 5 star quality facilities that lead to high occupancy rates and same store sales. Same store sales grew by 4.0% y/y in the third quarter of 2016. 

Growth via acquisitions is great, but if Ensign is going to have long-term success then it will need to come in the form of organic growth. That is why management places such emphasis on turning around the quality of the facilities in an effort to increase occupancy rates. In the most recent earnings call, CEO Christopher Christensen stated that they have “yet to tap into the exceptional amount of organic growth potential inherent in our operations”. 

What has the stock done lately?
ENSG announced third quarter results on November 2nd, and reported a slight hiccup in their earnings for the quarter. Actual earnings per share were $0.32 compared to the slightly higher consensus of $0.34. This was really the only downside that was announced; as EBITDAR for the quarter was $64.3MM and experienced a 19.7% increase year over year. Revenue was also up 22% from the prior year quarter. Despite the slightly disappointing EPS results, the stock price is up 19.44% since third quarter earnings were released. ENSG also paid a dividend of $.04 this quarter.

Past Year Performance: With a 52 week range of $17.60 to $24.84 and a stock price that is up roughly 1.1% YTD; the stock has performed neither exceptionally well nor exceptionally poor. This is the only quarter of 2016 that ENSG has missed on earnings and it does not seem to have affected the price negatively.

 Source: FactSet

My Takeaway
While ENSG may have missed on earnings this quarter, management reassured investors that much of the earnings for the year are expected to arrive in the fourth quarter. They anticipate a surge in earnings due to increases in occupancy rates and skilled mix as more facilities move out of the transition phase after being acquired. Acquiring and transitioning new facilities may have a negative impact on their short term performance; but the drivers behind the stock remain solid for the long term. Over time these acquired facilities will be able to generate significant organic growth, which, once realized should lead to some appreciation in stock price. Investors seem to believe in this sentiment as well seeing that the stock price of ENSG increased following the earnings call, despite missing on EPS.