LHC Group, Inc. (LHCG, $165.59): “Adding to the Group”
By: Ryan
Witt, 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.
Summary
- LHC
Group, Inc. (NYSE: LHCG) is a post-acute healthcare company that
services patients through nursing agencies, hospices, and long term assisted
care facilities. Currently, LHCG operates through three main segments: Home Health
(71% of revenue), Hospice (12%), and Home & Community-Based Services (9%).
- LHCG has surpassed its original target price of $121.64 and has returned the small cap fund 78.86% since its inception in November of 2018.
- LHCG has seen its EPS decrease from 0.98 in FY19 to 0.75 in FY20. It is estimated to be reaching 1.39 for FY21.
- Despite nursing homes and the assisted care facilities being hit extremely hard by Covid-19, sales stayed relatively stable decreasing by less than 1%. LHCG fell less than the industry.
- Since the beginning of FY21 LHCG has made over 10 acquisitions of smaller hospice and healthcare services companies to expand their footprint across the US. This will add to LHCG’s already large home health locations of 537 and allow them to deal with more than 20 million combined patient encounters a year.
Key
points: While the Covid-19 pandemic effected nursing homes and hospice
facilities greatly, LHCG was able to stay away from substantial losses by only
seeing revenue go down by less than 1%. LHCG saw a decrease in the number of
patients due to the nature of the pandemic which has left them with fewer people
in their facilities and using their services.
Currently LHCG is focusing on
keeping its many patients healthy and away from Covid as many are at risk to it.
It currently has treated about 26,000 of active patients and out of their
hospice segment just above 700 ended up testing positive for Covid. They were
able to have great control over the virus and limit spreading throughout its multiple
facilities. While a portion of their patients were lost to covid, the 65+
population in the US is expected to double to 95 million by 2060.
Recently, LHCG has ten acquisitions
for FY21 with three pending and three just completed on Aug 1st,
those being MSA hospice, Ashley County Medical Center Home, and Cavalier Healthcare
Services. The three of these together are expected to boost the bottom line by
$8 million a year along with the boost from the other seven acquisitions as
well. LHCG has earmarked $502 million of acquisitions for the year and about
71% of that is towards hospice services within different parts of the US. The
most important acquisition to take note of is the Heart of Hospice acquisition
that LHGC made which adds 16 hospice locations to the company’s large footprint
of locations already. It is expected that this acquisition will bring in about $92
million of annualized revenue for LHCG.
The reason for the fall in price
was primarily due to LHCG operating in a very competitive industry with many peers
and it fell about 12% since earnings were released in early August. However,
when compared to the industry which fell about 38% they did a lot better than
one might expect. They are an industry leader and have considerable market
share of about 11% within the home healthcare space. Even though it is a highly
competitive market no one company is much bigger than LHCG. Many of the
companies in the home care market look to rebound after Covid caused such a disruption
to the industry.
While the stock price has dipped
in the past year, LHCG did beat earnings revenue estimates. A portion of the
decrease in price was primarily due to the pandemic, but as well the decrease
in operating income which was also largely due to the efforts of dealing with
the pandemic. Home health and hospice should be expected to recover as we move
into the end of FY21 and into FY22.
What
has the stock done lately?
As of recent, LHCG has experienced
a dramatic stock price fall from when it was initially at 216.60 on July, 30th
of the year. Since the beginning of the year the stock price has fallen 22.37%.
Since the beginning of September, the stock has fallen over $20 after hovering
around the $180 mark. LHCG experienced about a 12% decrease from August 4th
to 5th following the earnings release for the second quarter. Additionally,
the stock price has not been able to get back to above $210 since April of this
year.
Past
Year Performance: LHCG has decreased by 19.12% over the past year
compared to the Russell 2000 which has increased 51.29% over the past year. Recent
contractions in its operating margin and the home healthcare market being hit hard
by the pandemic has led to such a price decrease. The 52-week average for LHCG
has been $165.59-$236.81. Currently, LHCG is trading at the 52-week low at $165.59.
My
Takeaway
LHCG has experienced a tough past
couple of months in which saw the stock price dip drastically. The home health
market has been very shaky especially as we move on through the pandemic. LHCG
continues to expand and boost its revenues through M & A deals with a focus
primarily on hospice. Many of their facilities will see a decrease in the number
of patients now due to deaths during the pandemic, but luckily the population
is expected to continue to grow into the future and the need for later in life
services will become more important. An important thing to not is that the industry
as a whole fell further then LHCG. For these reasons my recommendation is that LHCG
is a hold, and it is my belief that it will get past this hurdle that the
pandemic had created.
