There’s ‘Gold’ in the Aging of America

11/24/2008 12:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, editor of Rising Star Stocks, sees mega-profits from retiring baby boomers.

Baby boomers, 26% of the US population, are beginning to enter their golden years. Most families will seek at least some assistance, which is why Almost Family (Nasdaq: AFAM) is well-positioned to profit.

The company has two business segments: visiting nurses (accounting for 80% of revenues) and personal care, and operates more than 90 service locations, mostly in Florida (which produces nearly half the company’s revenue), and in Kentucky, Ohio, Connecticut, Massachusetts, Alabama, Indiana, Illinois, and Missouri.

The Center for Medicare & Medicaid Services is forecasting 7.7% annual growth in home health care spending, reaching $119 billion by 2017, with Medicare and Medicaid providing the lion’s share of the funding (84%). Because government programs are by far the biggest payers for these services, reimbursement issues often drive stock performance. New rules, which favor smaller payments over longer periods of time, mean more people will opt for services like Almost Family’s.

In the June 30 quarter, revenue increased to $48.7 million from $32.5 million a year earlier. Net income rose to $3.9 million, or $0.50 per share, breezing past estimates for $0.38 per share. Over the past four years, EPS has grown at a 60.7% compounded average rate, driven not only by internal operations but by sagacious acquisitions, primarily in the higher-margin visiting nurse segment. For the second quarter, revenues in this segment rose 66%, to $38.9 million. About $7.6 million of this growth was due to acquired operations. August acquisition, home health care agency Patient Care, generated $47 million in revenue in 2007, bringing Almost Family’s annual revenue run rate to $200 million and extending the company’s footprint into New Jersey, Pennsylvania, and Connecticut, where it will likely leverage its presence.

The business model, if not recession proof, is recession-resistant. Wall Street expects EPS to surge 35% this year. The estimate for next year’s earnings is 20% higher, to $2.26. Almost Family is trading at 20 times 2009 EPS, which might seem a little rich in this credit-squeezed market. But when juxtaposed next to growth expectations, it’s actually low. Its price-to-earnings growth (PEG) ratio is only 0.50 (anything below one is considered a value). In contrast, competitors Amedisys (Nasdaq: AMED) and Gentiva Health Services (Nasdaq: GTIV), sport PEG ratios of 0.72 and 0.95, respectively, and carry higher debt loads relative to total capitalization and less liquidity, based on current ratio comparisons.

Dependence on Medicare and Medicaid makes the company vulnerable to changes in policies, but we consider a cutback in the growth of these expenditures highly unlikely. We expect average annual EPS growth of 15% through the next two years. Beyond 2010, we expect EPS growth to average 6%—conservative—given the long-term prospect of government spending averaging nearly 8% per annum. Our intrinsic value estimate is $47.

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