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REAL CLIENT MANAGED PORTFOLIO MEMORANDUM TO: FROM: SUBJECT: DATE: Real Client Managed Portfolio Spring 2015 Neha Saoji, Prateek Baveja, Martin Maurer, Yifan Liu NHC Investment Recommendation April 30, 2015 RECOMMENDATION: HOLD Company Overview National HealthCare Corporation is listed on NYSE under NHC ticker symbol. It provides long-term care services and is primarily in south and southeastern parts of United States. 95% of its revenues are generated from its core activities under 4 business units – Skilled Nursing Facilities, Rehabilitation Care, Senior Living Services, and home health care services. The majority of its revenues are from Medicare and Medicaid payments. NHC invested in 24 new constructions and facilities since September 2013. The stock is currently trading at 63.69 as close of 29 April 2015. We purchased 100 stocks at $55.25 on 14 May 2014 and since then earned a holding period return of 16.5%. Macroeconomic and Industry Overview Within the United States there are over 58,500 different long-term care providers, which gives no particular provider a dominant position in this industry. Also the competition is intense in the southern region where NHC has the majority of its facilities. The main healthcare industry drivers include a growing number of individuals older than 65, an increase in federal Medicare and Medicaid expenditures, and an increased number of individuals holding private health insurance. These are positive factors for future prospects of NHC. Occupancy rates have been declining somewhat over the last 5 years, but NHC has been faring well above the industry. Valuation We have used both the DCF and Comparable company approach to value NHC. Our WACC for NHC is 7.43% and we have included a business risk premium of 1% to derive a discount rate of 8.43%. Using a 3% terminal growth rate, the implied stock value is 59.98. For comparable company analysis we have collected data for 4 companies with similar services. These include – Ensign Group, Diversicare, LHC Group, and Addus HomeCare. Using EV/Revenue, EV/EBITDA, and P/E multiples we derived an average implied price of $62.2. Recommendation We believe that we have used conservative approach in both our comparable and DCF analysis, and both the values are close to the current trading price of 63.69. We would like to give a hold recommendation on the NHC stock based on our analysis. We strongly believe that the new facilities have the potential to boost earnings as evident in the last year along with demographics that are in NHC’s favor. If NHC is able to capitalize on its opportunities at hand then, we anticipate that NHC’s stock price will continue to increase over the next year.