Home is Where the Money Is

For investors, it appears as though there really is no place like home, at least for those tapping into strong companies benefiting from the home health care boom.

If you've had the misfortune of experiencing a hospital stay at any point in your life, you're probably well aware that hospitals want to quickly address your medical issues and send you packing to make room for the next patient. That's where the home-health care business steps in. Demand for in-home care is rising fast as our population ages. As it stands, more than 37 million Americans are 65 or older, and about 10% require some form of health-related assistance. All things considered, it's not difficult to see why Oppenheimer & Co. analyst Michael Wiederhorn calls home health care the wave of the future.

The home health care sector as a whole is flourishing as major players in the space are capitalizing on an aging population of Baby Boomers, rising health care costs, and Americans' growing preference to be treated at home by offering a more cost-efficient and convenient alternative to traditional hospital stays. 

Home health-care providers are reaping the benefits of expanding Medicare enrollments, which are projected to balloon to 76.8 million by the year 2030, up from 42.5 million in 2005. Health-care spending is expected to grow nearly five-fold to $155 billion by 2017.

While Medicare reimbursement changes and high gas prices are putting the squeeze on some providers of home health care services—many are now forced to pay mileage to the nurses, aides, technicians and suppliers who travel to care for patients—others have barely blinked and continue to thrive in these economically uncertain times.

One such example is LHC Group Inc. (Nasdaq: LHCG). Based in the bayou town of Lafayette, Louisiana, LHC has carved out a niche in a highly fragmented market by providing rural-area care to the elderly, disabled and ailing (there are approximately 13,000 agencies nationwide providing these types of services). Operating in 13 states, primarily in the South, LHC  has around 200 service locations (double the number it had in 2005) and over 4,500 employees that visit and treat some 60,000 patients each year. In addition to providing home-based services, primarily through home nursing agencies and hospices, the company also offers facility-based services through long-term acute care hospitals and inpatient and outpatient rehabilitation clinics.

The second-quarter was good to LHC. For the three months ended June 30, net service revenue swelled 27.7% to $90.1 million, while net income increased to $6.3 million, or $0.35 a share, compared with $5 million, or $0.28 a share, in the same period in 2007. The company also expressed a bullish future outlook, raising its 2008 revenue guidance to a range of $350 million to $370 million, up from its previous forecast of $340 million to $360 million, and earnings per share of $1.35 to $1.45, up from $1.30 to $1.40.

In a statement accompanying financial results, LCH chief executive officer Keith Myers called the second-quarter 2008 "a breakout quarter" and said "I believe our performance by every measure should be an indicator of what lies ahead."

Analysts seemed to agree. Following the release, SunTrust Robinson Humphrey’s David MacDonald reaffirmed his existing "Buy" rating while upping his target to $34 from $25. In a July 31 note, he said LHC was "well-positioned to capitalize" on continued acquisitions, noting that management had plans to step up its pace of acquisitions (more on that later). MacDonald raised his full-year earnings estimates by $0.08 in 2008 and 2009 to $1.42 and $1.62, respectively.

Jefferies & Co. analyst Arthur Henderson maintained his "Buy" rating on LHC and in a July 31 update called LHC "the most compelling Buy in the home nursing sector at the moment." He increased his 12-month target to $35 from $31 and also raised full-year EPS estimates a few cents, to $1.35 for 2008 and $1.60 for 2009.

Ralph Giacobbe of Credit Suisse followed suit by maintaining an "Outperform" rating, while raising his price target to $28 from $27 (LHC stock was trading in the $23 range at the time). He said the company had shown "strong volume-driven top-line growth, steady margins, nice improvement in DSOs (days sales outstanding), and solid cash flow" in the quarter and upped his earnings forecast to $1.41 and $1.65 for 2008-09.

Deutsche Bank's Darren Lehrich maintained his "Hold" but raised his price target to $30 from $23 and his 2008 earnings estimates to $1.45 from $1.32 (he now expects 2009  EPS to come in at $1.76 instead of $1.48). The added that LHC's second quarter "gives us much greater confidence in its ability to manage growth," and noted he was "favorably inclined" on the company’s strategic position.

On August 1, analysts at Avondale Partners maintained their "market outperform" rating on LHC and boosted their target price from $29 to $32. In a research note, the firm noted the company is displaying "robust internal growth," and "effective expense management." It also said that LHC continues to make gains in back office and collections management, and added that the company continues to have a robust pipeline of acquisition opportunities.

LHC shares have risen about 40% in the past year, making the company stand out in the pack and attracting the attention of Wall Street. Thomson Reuters says that of the 10 analysts who track the stock, six rate it a "Strong Buy" or "buy," while the remaining four have “hold” rating on shares.

Competition in the home health sphere is heating up and experts say the U.S. home-health care industry is trending toward consolidation over the next few years. For its part, LHC is eyeing expansion through a growth strategy heavily reliant upon acquisitions and partnerships. In the past year the company initiated a wave of purchases and began forming alliances with hospitals seeking to outsource their post-acute-care treatment.

Some of the most recent are: the March 2008 buyout of Home Care Connections, Inc. and Rivercrest Home Health Care, Inc., which gave LHC four new locations in San Antonio, Amarillo, Uvale and Odessa, Texas; the May 2008 announcement that it inked a deal to acquire Home Care Solutions of Nashville, a move that expanded the company's business in Tennessee and provided access to the Virginia market (the acquisition will be accretive to 2008 earnings); and two separate joint ventures, which it entered into in June 2008: forming relationships with Jefferson Regional Medical Center, a 471-bed facility in Pine Bluff, Arkansas, to provide home health services, and Community Medical Center of Izard County, a 25-bed critical access hospital in Calico Rock, Arkansas, through which it will provide home health and hospice services. 

It appears as though home health care is here to stay, especially given the rise in healthcare costs in the United States. The price tag of a typical one-day stay in a hospital or at a skilled nursing facility is in the neighborhood of $3,800 and $490, respectively; compared to the $100 figure associated with the average homecare visit (LHC estimates its in-home care costs $50 a day).

LHC stocks may not be a cure-all for investors but considering analysts expect the company to produce 20% compounded annual growth over the next five years, it appears to be solid play on the home health boom.

LHC's 52-week high is $27.06, while its 52-week low is $13.55.

Our recommendation: Buy shares of LHC Group Inc. (Nasdaq: LHCG) at or near $29.13.  

Shannon Roxborough
Analyst, Medtech Millionaire