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URL:  https://boards.fool.com/mue-pitch-lhcg-29129472.aspx

Subject:  MUE pitch: LHCG Date:  2/24/2011  7:15 PM
Author:  ajner Number:  237 of 1287

Jim:

LHC Group (LHCG) is part of the beaten-down group of home health care stocks. It is not as cheap as AMED or AFAM--which are being investigated by the SEC for their Medicare billing practices--but that's because LHCG has not been implicated in any wrong-doing. I believe a company that has 4.2m in debt, vs. 60m in TTM FCF, a history of high ROIC, and consistent top and bottom-line growth, deserves a look. Here's how my valuation inputs look...

LHCG: $29.40
DR: 15%
FCF: 60m
SHO: 18.68m
DEBT: 4.18m
CASH: 7.21m

I ran a reverse DCF analysis, with declining growth rates...

5% ASSUMED 5y FCF GROWTH
4% ASSUMED 5-10y FCF GROWTH
2% ASSUMED TERMINAL GROWTH

If you look at historical FCF growth rates, they look like this...

23.1% 5-y REV GROWTH
22.7% 5-y EPS GROWTH
27.2% 5-y FCF GROWTH

If the future of home healthcare were in decline, I'd understand this valuation, but the long-term outlook is bright. There have been recent Medicare cuts of 5% to home healthcare providers, but given the cost savings they represent compared to hospital visits, I don't think these cuts will be deep or sustained. We've seen this before. In October of 2000, Medicare completely restructured it's payment system for home healthcare agencies, but industry survived. As only AFAM and AMED face the overhang of an SEC investigation, LHCG deserves to trade at a greater premium to these beleaguered names.

Looks like MUE's to me.

-AJner
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