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Zacks Industry Outlook Highlights: Ensign Group, Brookdale Senior Living and Five Star Quality Care

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·9 min read
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For Immediate Release

Chicago, IL – March 17, 2021 – Today, Zacks Equity Research discusses Nursing Homes, including The Ensign Group, Inc. ENSG, Brookdale Senior Living Inc. BKD and Five Star Quality Care, Inc. FVE.

Link: https://www.zacks.com/commentary/1280585/cost-woes-low-occupancy-hit-nursing-home-space-3-stocks-to-shun

Players in the Zacks Medical-Nursing Home industry are likely to gain from the growing number of older adults, which drive demand for nursing home facilities. Provision of ancillary services, such as outpatient therapy services, health and wellness, fitness and concierge services are likely to aid players in the space.

However, the nursing home companies are feeling the heat from surplus supply of facilities, which is weighing on its occupancy levels; stiff competition with players entering this fragmented market; increased cost of labor and investment in technology, which is escalating the operating costs. Companies like The Ensign GroupBrookdale Senior Living and Five Star Quality Care are pressed with issues plaguing the industry.

About the Industry

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 recuperating from major medical procedures and senior patients with chronic disabilities, and deteriorating mental and physical capacities. A wide array of healthcare and dependent-care services is 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.

3 Nursing Home Industry Trends to Keep an Eye on

Oversupply Leading to Occupancy Challenges: While construction of new senior living communities slowed down during 2020, the industry experienced several years of significant construction of new communities and other buildings to service older adults. This resulted in excessive supply and put downward pressures on occupancy and the rates that operators can charge for their services to their residents.

In addition, burdens on governmental budgets induced reductions or limitations in government funding growth for senior living and healthcare services despite the increasing regulatory requirements imposed on the industry. These revenue pressures are buffeted by increased costs for labor, insurance and regulatory compliance. At the same time, older adults are raising the age limit at which they move to senior living communities or forgoing such a move entirely.

Solid Demand Driven by Aging Population: The primary market of the senior living industry consists of individuals aged 80 and above. Owing to demographic trends, and continuous advancements in science, nutrition and healthcare, the senior population will surge constantly. US Census projections suggest that starting 2022, there will be nearly one million new potential residents per year and we believe that demand for senior care will increase as a result.

As seniors are living longer, leading to rapid growth in this segment of the population, so is the number suffering Alzheimer's disease, other dementias and the onus of other chronic diseases and conditions. As a result of increased mobility in society, shrinking of average family size and the growing number of two-wage earner couples, families struggle to provide care for seniors and therefore look for alternatives outside their familial bounds for care. There is a growing awareness among seniors and their families concerning the types of services provided by senior living operators, which further buoyed demand for assisted living services.

High Cost: In recent years, the high level of new openings, nursing and caregiver shortages due to the pandemic, lower levels of unemployment and implementation of higher minimum wages generally gave way to wage pressures and stiffened competition for community leadership and personnel.

Companies are facing adverse effects on their results due to increasing salaries, wages and benefit costs. Higher costs of food, utilities, equipment and supplies, insurance and real-estate taxes are also denting financial results.

Zacks Industry Rank Indicates Dull Prospects

The group’s  Zacks Industry Rank which is basically the average of the Zacks Rank of all member stocks, indicates bearish near-term prospects. The Zacks Medical-Nursing Home industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #245, which places it at the bottom 3% of 253 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of discouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are not so optimistic about the group’s bottom-line growth potential. Over the past twelve months, the industry’s earnings estimates for the current year have been revised 19.4% downward.

Thus, given the lackluster near-term prospects, companies in the space are expected to take a hit. Now let’s check out the industry’s recent stock market performance and its valuation picture.

Industry Outperforms S&P 500 and the Sector

The Zacks Medical-Nursing Home industry has outperformed the Zacks S&P 500 composite and also fared better than its own sector over the past year. The stocks in this industry have collectively skyrocketed 210% in the past year while the Medical sector has risen 31.2%. Meanwhile, the Zacks S&P 500 composite has gained 67.6%.

Industry’s Current Valuation

On the basis of the 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 16.3X compared with the S&P 500’s 11.1X and the sector’s 9.1X.

Over the past five years, the industry has traded as high as 17.4X, as low as 4.1X and at the median of 5.7X.

3 Stocks to Avoid Now

Ensign Group provides healthcare services in the post-acute care continuum, urgent care center and mobile ancillary businesses in the United States. Recently, the company authorized the separation of its home health and hospice business and also all its senior living operations from the parent company into a separate publicly traded entity.

On the completion of the transaction, there will be two different companies, namely The Ensign Group, Inc. and The Pennant Group, Inc. The first will consist of the transitional and skilled services, rehabilitative care services, healthcare campuses, post-acute-related new business endeavors and real-estate investments. While the second entity will comprise the company’s home health and hospice business line and substantially, all its senior living operations.

This presently Zacks Rank #4 (Sell) company has been witnessing an increase in total expenses since 2012. Expenses rose 14.2% and 14.3% year over year in 2019 and 2020, respectively, due to higher cost of services, general and administrative expenses, etc. This rising trend in expenses continues to hurt the company, hurting its bottom line.   You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Brookdale Senior Living Inc.’s earnings suffered a setback from COVID-19 with revenues and occupancy levels being hard hit. In February, it agreed to sell a majority stake in its hospice, home health and outpatient therapy business to HCA Healthcare (NYSE: HCA). Brookdale will sell 80% of equity in its health services segment to HCA for a purchase price of $400 million.

The Zacks Consensus Estimate for this year’s loss per share has widened to $1.56 from $1.50 over the past 30 days.

The stock carries a Zacks Rank #4, presently.

Five Star Senior Living with a Zacks Rank of 4, presently, is one of the largest senior-living management companies in the United States, based on unit count. The company witnessed a revenue decline in 2020 due to lower revenues from senior-living business.

On Jan 1, 2021, the company completed the restructuring of its business arrangements with Diversified Healthcare Trust, a transaction that had an immediate positive impact on its financial stability, allowing it to focus on optimizing its senior-living operations and providing it with the liquidity to make strategic investments in its business for supporting new initiatives to boost growth.

The Zacks Consensus Estimate for this year’s earnings per share has been revised 34.2% downward to 25 cents over the past 30 days. The stock has appreciated 17.8% over the past year.

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