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REAL CLIENT MANAGED PORTFOLIO MEMORANDUM
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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.