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Nursing Home Industry Should Thrive on Aging Population

Zacks Equity Research

Companies in the Zacks Medical-Nursing Home industry provide long-term skilled nursing care and social services. The industry includes skilled nursing facilities for recovery from acute or chronic medical conditions, mental health and substance abuse facilities, and various types of independent living, community care and assisted living arrangements.

Nursing homes typically care for patients recovering from major medical procedures and older patients with chronic disabilities and deteriorating mental and physical capacities. A wide array of healthcare and dependent-care services are provided, including 24-hour nursing care, physical therapy, help with activities of daily living — such as bathing, eating and dressing, housekeeping, food service, personal services, and leisure activities.

Here are the industry’s three major themes:

•    Nursing homes contact with insurers and managed care organization for patients. Ongoing consolidation in the health insurance space has reduced the number of payers to contract with, thus increased competitive pressure. Moreover, reforms under the Patient Protection and Affordable Care Act of 2010 (PPACA) stresses on the quality of care provided by nursing homes. In this vein, reimbursement for services based on value of care has been introduced. This has prompted providers to make fundamental changes in their day-to-day operations to better coordinate and manage the care of patients, improve care transitions, reduce lengths of stay and prevent avoidable re-hospitalization. These trends have in turn resulted in a decline in the occupancy in recent years and will continue to be so in the coming years.

Nevertheless, as life expectancy continues to increase in the United States and seniors account for a higher proportion of the population, overall demand for the services provided by the nursing homes will likely increase. Thus players in the industry that can render cost effective and efficient services should benefit.  

•    In recent years, continued efforts by governmental and private third party payors to contain the rate of payment for the provision of healthcare services has impacted players in the nursing home industry. Federal Medicare and Medicaid reimbursement rates have been inadequate to accommodate the rising cost of health care services. In addition to rate pressure, in recent years, there has been a shift from “traditional” Fee-for-Service Medicare patients to Medicare Advantage patients, which are less profitable thus negatively impacting profitability.

In addition to the federal Medicare program, a number of states use managed care to coordinate long-term care support services and many states are interested in implementing or expanding existing ones.  The emergence of managed Medicaid programs has resulted in lower rates of reimbursement for the nursing home services and has introduced new challenges and complexities with respect to billings and collections. Further migration toward managed Medicare and Medicaid care programs is expected to continue, which will keep profitability under pressure.

•    The nursing homes industry is labor intensive and salaries and wages amount to more than 50% of total revenues. Providing quality care entails nursing homes to have professional and skilled nurses, which further leads to high personnel costs. The industry is faced with a shortage of nursing staff, thus attracting and retaining skilled nurses are leading to high labor costs. According to the Bureau of Labor Statistics, the nursing shortage is expected to persist through 2025. Moreover, investments in information systems and medical technology should keep overall costs on the high side.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. The Zacks Medical-Nursing Home industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #22, which places it at the top 9% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present few nursing home stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outshines S&P 500 and Sector

The Zacks Medical-Nursing Home industry has underperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively gained 12.3% in the past year while the Medical sector has declined 6.5%. Meanwhile, the Zacks S&P 500 composite has lost 4%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month Enterprise Value to EBITDA (EV/EBITDA) ratio, which is commonly used for valuing nursing home stocks, the industry is currently trading at 6.52X compared with the S&P 500’s 10.41X and the sector’s 9.75X.

Over the past five years, the industry has traded as high as 14.61X, as low as 3.91X and at the median of 5.67X.

EV/EBITDA (TTM)

EV/EBITDA (TTM)

Bottom Line

Investment in medical technology and upgrade of systems and procedures to provide efficient services will keep costs high. Reimbursement pressure from government and consolidation in the health insurance space will result in stiff competitive conditions.

Shortage of skilled nursing facilities and high wages will continue to eat into revenues. Nevertheless, the changing demography of the United Sates with increasing senior population will continue to drive demand for nursing home services.

Stocks to Consider

Investors may consider buying the following stocks that carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Capital Senior Living Corp. (CSU) is one of the largest providers of senior living services in the United States.

The stock has declined 33.3% in a year’s time. The company has an estimated earnings growth rate of 4.1% for 2019 compared with the industry’s growth rate of 5.3%.

Price and Consensus: CSU
 

 

Brookdale Senior Living Inc. (BKD) is a leading owner and operator of senior living facilities throughout the United States.

The stock has declined 18.6% in a year’s time. The company has an estimated earnings growth rate of 75.52% for 2019 compared with the industry’s growth rate of 5.3%.

The company surpassed estimates in two of the last four quarters, the positive earnings surprise being 3.8%.

Price and Consensus: BKD

 

Genesis Healthcare, Inc. (GEN) provides long-term care, assisted/senior living and rehabilitation therapy.

The stock has gained 74% in a year’s time. The company has an estimated earnings growth rate of 27.14% for 2019 compared with the industry’s growth rate of 5.3%.

The company surpassed estimates in two of the last four quarters, the positive earnings surprise being 4%.

Price and Consensus: GEN
 

 

Here are two stocks with a Zacks Rank #3 (Hold) that investors may want to hold on to for the time being.

The Ensign Group, Inc. (ENSG) provides broad spectrum of skilled nursing and assisted living services, physical, occupational and speech therapies, home health and hospice services and other rehabilitative and health care services at health care facilities, hospice agencies, home health agencies and home care businesses.

The stock has gained 72% in a year’s time. The company has an estimated earnings growth rate of 12.43% for 2019, compared with the industry’s growth rate of 5.3%.

The company surpassed estimates in each of the last four quarters, the positive earnings surprise being 1.8%.

Price and Consensus: ENSG
 

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