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No. of Recommendations: 3

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...


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.

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No. of Recommendations: 1

I've done quite a lot of work on LHCG, actually. I probably saw the same attractive attributes you did.

The problem with running a MUE reverse DCF on LHCG is that it doesn't quite capture what is going on in the industry, namely:

* The changing revenue dynamic (lowered medicare reimbursement)
* Higher expesne structure due to face to face requirements
* Higher ongoing expenses related to reporting and oversight

Given that these things will have a meaningful impact on gross and operating margins, free cash flow will look considerably different in 2011 than it did in 2010. So using 2010 as a base year is problematic.

The other things that deterred me from biting on LHCG (to name a few) were:

* The industry is a pure price-taker industry
* The industry is acquisition dependent
* Less-than ethical industry participants will attract value-destroying legislation

Other than that, I think LHCG is clearcly the best operator in the industry, and its differentiated strategy gives it a leg up.

Just my thoughts,

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