national healthcare corp. by neha saoji martin maurer yifan liu prateek baveja presented april 30,...
TRANSCRIPT
National Healthcare Corp.
By Neha Saoji
Martin MaurerYifan Liu
Prateek Baveja
Presented April 30, 2015
Real Client Managed Portfolio
2
Introduction
Company Review
Macroeconomic Conditions
Industry Prospects
Stock Market Performance
Financial Analysis
Financial Projections
Valuation
Recommendation
Agenda
3
May 14, 2014 Purchased 100 shares
@ 55.25 Cost Basis: $5,525
Position and Transaction History
Introduction – Current Position
Stock Performance till date
April 27, 2015 Current price: 64.36 Market Value: $6,436 HPR = 16.5% P&L = $911
December 2, 2014 Hold 100 shares
@$59.82
4
20 day MA consistently above 200 day MA 30 day RSI neither overbought or oversold
Source: S&P Capital IQ
Recent Stock Performance
5
Underperformed Small-Cap Health Care Services Index
Source: S&P Capital IQ
Recent Stock Performance
6
2014 Revenues
Net patient revenues Other revenues
95%
5%
Main Business Activities
Skilled Nursing Care
Rehabilitation Care
Senior Living Services
Home Health Care Services
Source: 2014 10-k.
Business Overview
Other Business Activities
Management, Insurance &
Financial Services
Hospice Services
Provider of Long Term Care Services
7
No individual customer or group of customers account for a significant portion of revenues
Care must be ordered by a physician
Source: 2014 10-K, p. 7
Business Overview
Patients receive funds to pay cost of care from the following sources
MedicareMedicaidPrivate PayManaged Care
Customers Sources of Revenues
8
Alabama (3) Florida (8) Georgia (3) Kentucky (2) Massachusetts (4) Missouri (16) New Hampshire (3) South Carolina (25) Tennessee (53) Virginia (1)
Source: NHC website: http://www.nhccare.com/locations.cfm
Business Overview – Facilities and Programs
16 2
53
3 3
1
25
8
3
4
Skilled nursing & senior living facilities, and homecare programs
9
Management underperformed peers
Source: Bloomberg
Management
10Source: 2014 10-K, p. 12 and p. 33
Strategic Objectives
24 new constructions or facility purchases since Sept. 2013
Growth in assisted living market Expand long-term care operations
2010 2011 2012 2013 20140
100
200
300
400
500
600
700
800
900
620653
653
628
815
Assisted Living Units
2010 2011 2012 2013 201464
66
68
70
72
74
76
7877
75
75
69
74
Total Operating Centers
11
S W
TO
SWOT Analysis
Many private payers (25%)
Integrated business segments
Wrongful death lawsuits
Industry regulation
Decline in occupancy rates
Dependence on third-party payers and reimbursement rates
Aging population Increasing insurance
coverage (Affordable Care Act)
12Source 1: “Number of adults aged 65 and older.“ IBISWorld Business Environment Profiles. IBISWorld. May 2014. Source 2: Federal funding for Medicare and Medicaid.“ IBISWorld Business Environment Profiles. IBISWorld. July 2014.
Macro Review – Industry Drivers
2010
2012
2014
2016
2018
2020
30
35
40
45
50
55
60
Adults aged 65+
Million
s
2015
2016
2017
2018
2019
2020
0200400600800
100012001400
Federal Funding
Aging PopulationFederal Funding for Medicaid &
Medicare
5.8% CAGR
13“Number of people with private health insurance.“ IBISWorld Business Environment Profiles. IBISWorld. Oct.. 2014
Macro Review – Industry Drivers
20132014
20152016
20172018
20192020
200
205
210
215
220
225
230
235
Private Insurance Owners
Increased Private Insurance Ownership
14
58,500 long-term-care providers in U.S. in 2012
Source: CDC/NCHS, National Study of Long-Term Care Providers and Table 1 in Appendix B.
Industry Analysis
No dominant brand in
the industry
Intense competition
in the South and
West regions
Depends on referrals
from acute care
hospitals, physicians & others
15Source: http://www.ahcancal.org/research_data/trends_statistics/Documents/Trend_PVNF_FINALRPT_March2015.pdf
Industry Analysis - Occupancy Rates
16
Despite favorable demographic trends, decreased government funding has hindered growth
Annual Revenue Growth 2010 –
2015 2.9% Expected Annual Revenue Growth
2015 4.8% Expected Annual Revenue Growth
2015 – 2020 5.9%
IBIS World Industry Report 62311: Nursing Care Facilities in the US; Jan. 2015
Industry Outlook
17
Industry Rivalry:
Medium
Bargaining power of suppliers: Medium
Bargaining power of
buyers: Low-Medium
Threat of substitute:
Low
Threat of new entrants:
Low
Porter’s Five Forces
Meet requirements of insurance/Medicare for payments
Long-term relationship with drug providers
Patients can choose from a number of healthcare facilities, but the number is very limited
Barely no substitute can be found within the field
New form of healthcare need time to be developed
Large capital requirement and long time horizon
Accumulated word-of-mouth and reputation
18
Financial RatiosLiquidity Ratios
2009 2010 2011 2012 2013 2014Current Ratio 0.87 0.89 1.06 1.18 1.64 1.61Quick Ratio 0.83 0.86 1.02 1.15 1.60 1.57Cash Ratio 0.52 0.51 0.68 0.76 1.11 1.10
Profitability Ratios2009 2010 2011 2012 2013 2014
Operating Profit Margin 7.56% 8.00% 10.20% 8.97% 9.14% 7.80%Net Margin 5.95% 7.31% 8.40% 7.79% 8.19% 6.12%ROA 5.08% 6.35% 7.51% 6.41% 6.56% 4.97%ROE 7.62% 9.39% 10.62% 9.04% 9.39% 7.27%
Activity Ratios2009 2010 2011 2012 2013 2014
A/R Turnover 10.84 9.35 11.10 9.89 9.88 11.06Fixed Asset Turnover 1.57 1.65 1.80 1.81 1.73 1.69Total Asset Turnover 0.85 0.87 0.89 0.82 0.80 0.81Occupancy Rate 92.00% 92.00% 90.60% 90.10% 89.20% 88.90%
19
Financial Ratios
20
Assumptions
2013A 2014AAverage
(2009-14)Median
(2009-14) 2015E 2016E 2017E 2018E 2019ERevenues:Net patient revenues 735,837$ 829,287$ 879,044$ 930,908$ 985,831$ 1,040,052$ 1,092,055$ % growth 4.3% 12.7% 6.04% 6.76% 6.0% 5.9% 5.9% 5.5% 5.0%Other revenues 53,120 42,396 41,167 40,343 39,940 39,540 39,145 % growth -4.5% -20.2% -3.32% -3.70% -2.9% -2.0% -1.0% -1.0% -1.0%Net operating revenues 788,957 871,683 920,211 971,251 1,025,771 1,079,593 1,131,200 Percent of Revenue Growth (%) 3.67% 10.49% 5.38% 7.05% 5.57% 5.55% 5.61% 5.25% 4.78%Expenses and CostsSalaries, wages and benefits 453,560 510,249 533,722 565,268 599,050 629,402 659,489 % growth 6.24% 12.50% 6.68% 7.10% 4.60% 5.91% 5.98% 5.07% 4.78%Other operating 194,989 217,143 237,414 237,957 246,185 264,500 271,488 % growth -0.63% 11.36% 3.01% -0.19% 9.34% 0.23% 3.46% 7.44% 2.64%Facility rent 39,449 39,731 43,250 46,620 50,263 53,980 57,691 % growth 0.24% 0.71% 1.27% 0.71% 8.86% 7.79% 7.81% 7.39% 6.88%Interest 331 2,165 1,840 1,943 1,539 1,619 1,131 % growth -27.25% 554.08% 97.51% -13.65% -14.99% 5.55% -20.79% 5.25% -30.15%Depreciation and amortization 28,547 34,384 35,357 37,125 38,014 38,915 39,444 % growth -4.18% 20.45% 6.51% 6.48% 2.83% 5.00% 2.40% 2.37% 1.36%Total costs and expenses 716,876 803,678 851,584 888,912 935,051 988,416 1,029,243 % growth 3.48% 12.11% 5.32% 4.73% 5.96% 4.38% 5.19% 5.71% 4.13%
21
WACC Calculation
Cost of EquityRisk-free rate 2.63%Beta 0.78Market risk Premium 6.50%Cost of Equity (CAPM) 7.70%5 Yr Return to Shareholders 12.66%Weighted Cost of Equity 9.19%
Cost of DebtCost of Debt (Pre-tax) 6.23%Tax 37.0%Cost of Debt After Tax 3.92%
Cost of Preferred StockCost of Preferred Stock 5.09%
WACC 7.43%Business Risk Premium 1.00%Discount rate 8.43%
NHC WACC Calucalation5 Yr Beta from regression 0.705 Yr Beta from Capital IQ 0.86Average Beta 0.78
NHC Beta Calculation
5Year (annualized) 12.7%2 Year (annualized) 18.5%1 Year (annualized) 18.6%Half Year 12.9%Three Month 0.7%One Month -1.6%
NHC Return to Shareholders
LT-Debt 10,000PV of lease obligations 322,473Total Debt 332,473 23.9%Common Stock 890,140 63.9%Preferred Stock 170,494 12.2%Total 1,393,107 100%
LT Interest 2.80% 10,000 Operating Lease 4.20% 285,877 Capital Lease 23% 36,596 Total 332,473 Cost of Debt 6.23%
NHC Capital Structure
22
DCF Valuation
FCF Calculation 2014 2015E 2016E 2017E 2018E 2019ENet Income 53,363$ 60,163$ 69,741$ 76,024$ 77,301$ 85,042$ +Depriciation & Amortization 34,384$ 35,357$ 37,125$ 38,014$ 38,915$ 39,444$ -Change in Working Capital (53,298)$ (64,415)$ (58,275)$ (51,289)$ (43,184)$ (33,936)$ -Capital Expenditure (3,859)$ 11,416$ 3,567$ 5,801$ 5,848$ 5,755$
Free Cash Flow 19,689$ 45,023$ 56,948$ 67,184$ 84,795$ Terminal Value 1,607,809
Present Value of FCF 18,158$ 38,293$ 44,669$ 48,600$ 56,569$ Terminal Value 1,072,615$
Total Present Value 1,278,903$ Less: Debt 332,473$ Less: Preferred Stock 170,494$ Plus: Cash 69,767$ Implied Market Cap 845,704$
Number of Shares Outstanding 14100Implied Share Price 59.98$
23
Sensitivity Analysis
Sensitivity Analysis
2.6% 2.8% 3.0% 3.2% 3.4%6.43% $102.77 $109.50 $117.02 $125.47 $135.037.43% $73.60 $77.64 $82.04 $86.85 $92.148.43% $54.49 $57.14 $59.98 $63.04 $66.349.43% $41.00 $42.85 $44.82 $46.91 $49.14
10.43% $30.99 $32.34 $33.77 $35.27 $36.86
Disco
unt R
ate
Terminal Growth Rate
24Company 10-K’s and S&P Capital IQ
Valuation – Comparable Selection
Company Business Focus
Primary Payer Source
Capital Structure
(Liab./Assets)
Profitability (EBIT-
Margin)
Size (No. of
employees)
Ensign Grp. Skilled Nursing
Medicare (35%)
57.6% (1.7%) 25,000
Diversicare Skilled nursing
Medicaid (67%)
90.9% 1.4% 5,150
LHC Group Home care services
Medicare (75%)
32.3% 7% 8,628
Addus HomeCare
Corp.
Home care services
Illinois Dept. of Aging (53%)
29.2% 6.1% 10.790
NHC Skilled Nursing
Medicare (39%)
23.9% 8.1% 13,050
25
Comparable Valuation
Company Name
EV/Total Revenues LTM - Latest
EV/EBITDA LTM - Latest
P/E TTM
Diversicare (NasdaqCM) 0.4x 7.3x 22.6xAddus HomeCare Corporation (NasdaqGS:ADUS) 1.0x 13.3x 25.7xThe Ensign Group, Inc. (NasdaqGS:ENSG) 1.1x 11.9x 27.6xLHC Group, Inc. (NasdaqGS:LHCG) 1.0x 12.0x 26.5x
National Healthcare Corp. (AMEX:NHC) 1.1x 8.3x 20.3x
Summary StatisticsEV/Total Revenues LTM - Latest
EV/EBITDA LTM - Latest
P/E TTM
High 1.1x 13.3x 27.6xLow 0.4x 7.3x 22.6x
Mean 0.9x 11.1x 25.6xMedian 1.0x 12.0x 26.1x
Greenblatt Return on
Capital (Latest)
Greenblatt Earnings
Yield (Latest)
25.1% 9.0%30.9% 6.5%31.3% 6.3%45.8% 7.1%
8.1% 8.7%
EV/EBITDAEnterprise Value 1250.0Less: Total Debt 332.5Less: Preferred Stock 170.5Plus: Cash 69.8Equity Value 816.8/ Total Shares Outstd. 14.1Intrinsic Value/Share $57.9Market Value/Share $63.7
EV/RevenuesEnterprise Value 871.7Less: Total Debt 332.5Less: Preferred Stock 170.5Plus: Cash 69.8Equity Value 438.5/ Total Shares Outstd. 14.1Intrinsic Value/Share $31.1Market Value/Share $63.7
P/EEquity Value 1391.6 Total Shares Outstd. 14.1Intrinsic Value/Share $98.7Market Value/Share $63.7
Average Intrinsic Value
$62.6
26
DCF Valuation -
$59.98
Comparable Valuation
- $62.60
Market Value - $63.69
Recommendation
• Stock just slightly overvalued based on our analysis
Valuation
• New facilities have the potential to boost earnings as evident in the last year
Growth • Demographics are in our favor as discussed
Other factors