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Cooking and Housekeeping for Healthcare Facilities

10/11/2018 5:00 am EST

Focus: HEALTHCARE

Hilary Kramer

Editor, GameChanger Stocks

Healthcare Services Group (HCSG) is a solid, but unsexy firm, which provides essential basics — such as housekeeping, cleaning, linen and dietary services — for hospitals and senior living facilities, explains Hilary Kramer, growth stock expert and editor of GameChangers.

The housekeeping segment includes managing clients’ housekeeping departments, such as cleaning and sanitizing resident rooms and common areas of the clients’ facilities, as well as the laundering and processing of the bed linens, uniforms, resident personal clothing.

When the company wins a new contract to manage a facility, it becomes the new employer of the existing workforce, letting the management of the facility concentrate on core operations.

The dietary services segment is principally responsible for food purchasing, meal preparation and professional dietitian services, which include the development of menus that meet the dietary needs of residents. 

From 2012 through 2017, earnings per share (EPS) increased from $0.65 to $1.17, an average annual gain of 12.5%. Most of this growth came from the dietary segment. The good news is that there is plenty more room for HCSG to grow, as only 1,500 of the company’s 3,500 facilities are currently dietary customers.

HCSG shares responded well to the consistent growth. The stock was at an all-time high over $55 a share before the market sold off rapidly in February. However, the stock was a little extended from a valuation standpoint at this price and was vulnerable to disappointments.

When its first-quarter results were only breakeven, including a $39 million charge for uncollectable accounts at two multi-state skilled nursing facilities, its share price plunged to under $40 a share. A minor earnings disappointment in the second quarter also pressured shares.

Despite some pricing and earnings stumbles this year, I expect the company to recover strongly in 2019. A new reimbursement system from Medicaid and Medicare Services (CMS) — which will consider a more complete evaluation of patients in skilled nursing facilities, as opposed to just focusing on total hours of therapy provided — should lead to more stable cash flow and less risk for further receivable write-offs.

EPS next year should reach $1.75 a share in 2019, compared to $1.48 this year, which excludes the receivables charge. Currently selling at 23 times 2019 EPS estimates, the company is attractively valued relative to its growth prospects and potential risks in the current market environment.

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