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 ENSG SSG.pdf (46kb) downloaded 36 time(s). ENSG-RAM-201744.ITK (5kb) downloaded 15 time(s). Ensign Group operates a number of health care facilities oriented toward the aging US population. Its facilities include skilled nursing, assisted living services and physical, occupational and speech therapy. They also include home health care and hospice services as well as other health services. The revenue sources are mixed, coming from Medicaid, private pay, managed care and Medicare. They operate facilities in 14 states mainly in the western US with California (48), Texas(47) and Arizona (28) the states with the most facilities.
In May 2014 Ensign split the company by a spinoff of CareTrust, a real estate investment trust, to hold the real estate related portion of its business. The rationale was to concentrate on the healthcare business rather than property.
My club has been searching for a health care company with a focus on care for the aging population. With an estimated 76 million Baby Boomers this is a large market with growing numbers needing care. We have had Ensign on our watch list but it has been out of the buy range when considered for purchase.
Attached is a PDF version of an SSG generated using ToolKit. In addition, an ITK file for import is attached. The judgement calls and the rationale are as follows:
EPS growth rate – 10%. ValueLine does not estimate EPS growth but does report an analysts estimate of 15% EPS growth. Recent growth was negative. The decrease seems to be reversing. The Q4 2016 comparison to Q4 2015 are quite favorable with a 37% increase. Analysts average 5 year growth from ICLUBcentral’s Equity Research Service give a growth rate of 15%. All sources I checked did rate earnings predictability low. With all the above information I chose the lower 10% EPS growth rate.
Sales Growth Rate – The recent sales growth rate from the Equity Research Service is a solid 15.8%. This matches the historical sales growth. My 12.5% figure is just being a bit more conservative. Checking EPS growth with the Preferred Procedure, my estimated 10% EPS growth should easily be accomplished with 12.5% sales growth even with slightly declining margins. Future growth will come from demographic need for expanded elder care.
Projected High PE – The 10 year average high PE is only 15. This time period includes times before the CareTrust spinoff. Since the spinoff, PE ratios have trended higher. I chose to use a 5 year average high PE of 22.2.
Projected Low PE – A similar analysis was done for the projected low PE, settling on 13.9.
Projected Low Price – Using trailing 12 months earnings of .96 and a projected low PE of 13.9 gives a projected low price of 13.3. While this is a small company and subject to more price volatility I chose to stay with the estimated 13.3 low price. My rationale is the recent depression in healthcare related companies due to the unsettled political climate related to healthcare. Also, due to my more conservative EPS and sales growth rates.
My analysis gives an Upside/Downside ratio of 3.2, in the Buy range. This is contingent on the company stabilizing its current decline in EPS growth. Over the long-term I believe demographic trends favor such a scenario but the company does need to capitalize on this trend.
Ensign appeared as a recommended buy in the December 2016 Investor Advisory Service newsletter of ICLUBcentral. I currently do not own a position in the Ensign Group. It is being considered for a personal and club account.
Russell Malley
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I have been checking out this company as well. My concern is that the healthcare bill being passed by Congress (Trumpcare) eliminates $800 billion from Medicaid. The President's proposed budget cuts another $600 billion. Elderly people use Medicaid to live when in nursing facility or assisted living. Makes this company pretty risky.
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Medicare and Medicaid funding changes will have a big impact. I checked the most recent 10-K on the company website for how much of their revenue comes from these sources. Combined the two programs account for about 60% of revenue. Uncertainty and possible big cuts to these programs do significantly increase the risk for the Ensign Group.
The big question is how likely are these proposed cuts? While the House has passed a healthcare bill with the 800 billion in cuts, the Senate has stated they will not consider the House bill but rather write a separate one on their own. Unfortunately, they are doing this essentially in secret so hardly anyone knows what is being considered in the Senate bill, including nearly all senators. As for the cuts in the Administration's budget proposal most analysis I've seen are the overall proposal was a non-starter for Congress. This does not mean cuts won't be included in the final budget. Where and how much are wide open. Another issue is when a budget will actually be passed. Recent Congresses have passed multiple continuing resolutions delaying many budget decisions.
Even if one believes the House bill will not stand and the proposed budget does not get enacted there is still a lot of uncertainty. While the Senate majority says it plans to have their heath care bill ready by the end of June I think that is a stretch. It took about 14 months for the Affordable Care Act. Recently, the Senate Parliamentarian stated some of the items brought to him/her would not meet the conditions necessary to pass under Reconciliation rules. If those items remain in the final bill, the bill could be filibustered.
The political risks may outweigh the long-term need for elder-care at this time. At best there is delay in funding information which will probably keep this industry static to a little depressed. Although, Value Line noted a pick up in the Health Services sector recently. There may be some optimistic contrarians who see an opportunity in the chaos. I don't know if I am brave enough for that. So far neither my club nor I have made a purchase.
Russell Malley
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