Sector Watch: The home health market
Health care spending is rising at the fastest rate in U.S. history. According to the National Coalition on Health Care, U.S. health care spending reached $2 trillion in 2005, or $6,700 per person, and is expected to reach $4 trillion in 2015, representing 20% of GDP. Employer health insurance premiums increased 7.7% last year - twice the rate of inflation. Annual premiums for an employer health plan covering a family of four currently average around $11,500. Employment-based health insurance premiums have risen 87% since 2000, compared to cumulative inflation of 18% and wage growth of 20%. Experts agree the current health care system is riddled with inefficiencies, excessive administrative expense, inflated prices and poor management.
Hospital care costs are expected to exceed $1.2 trillion by 2016, versus 2006 costs estimated at $651.8 billion. Growth in hospital spending was 6.6% last year. The fastest-growing health care segment is home health care, which is estimated to have represented 12.5% of total spending, or $53.4 billion in 2006. Demand for home-based care services is rising in response to payer incentives, which favor home-based care over hospitalization, patient preferences and technology advances that allow many chronic conditions to be treated at home. Demand for home health care is expected to grow faster than the overall market because of an aging U.S. population and an increasing prevalence of chronic and co-morbid conditions treatable at home.
The home health market is fragmented, consisting of some 8,500 providers. Most are local or regional independently-owned agencies, visiting nurse associations or hospital-affiliated agencies. Medicare is the largest home health payer, spending $16.4 billion on home health care services last year. Spending is forecast to increase to $27.3 billion by 2010, according to Medicare actuaries.
Two small-cap companies positioned to benefit from health care trends favoring managed care and home-based services are Matria Healthcare Inc. (Nasdaq: MATR) and Amedisys Inc. (Nasdaq: AMED).
Matria Healthcare
Matria Healthcare provides health enhancement, disease management and high-risk pregnancy management services that help employers and health plans reduce costs. The company helps clients manage chronic diseases such as diabetes, congestive heart failure, coronary artery disease, asthma, pulmonary disease and cancer. Statistics indicate 15% of employees drive 85% of healthcare costs; Matria’s solutions begin with strong disease management programs that can immediately start curbing costs.
The Marietta, Ga.-based company’s revenues grew 88% last year to $336.1 million, reflecting a combination of acquisition and organic growth. Excluding share-based compensation, earnings from continuing operations rose 483% to $23.3 million or $1.08 per share. Earnings in the March 2007 quarter increased 52%. During the quarter 35 new programs were implemented; contract awards totaling $4.1 million were announced in April-May. The company targets 10% to15% revenue growth and 10% to 20% EPS growth in 2007.
Matria shares currently trade at a 12 P/E. My $35 price target for these shares is 20% above the current price. On Tuesday Matria established a new 52-week high at $31.33.
Amedisys
Amedisys is the country’s second-largest provider of home nursing services. These include skilled nursing services such as infusion therapy, monitoring assessments and patient education, and practical nursing services such as administering medications and changing dressings. Amedisys is benefiting from growth in Medicare patient admissions, which increased 13% last year. The company is also establishing referral relationships with large hospital systems, expanding geographically and making acquisitions.
Amedisys recorded net income of $38.3 million, or $1.72 per share, last year on revenues of $541.1 million. This compares with net income of $30.1 million, or $1.41 per share, in 2005 on revenues of $381.6 million. Earnings growth has exceeded 20% for four consecutive years.
Amedisys is targeting 2007 EPS between $2.05 and $2.15. During the March quarter of this year, revenues grew 21% year-over-year and EPS grew 50%. Amedisys currently operates 261 Medicare-certified home health agencies and 14 Medicare-certified hospice agencies in 19 states. Amedisys shares currently trade at a 21X P/E. My $41 price target for Amedisys is 15% above the current price.
Amedisys posted a new 52-week high of $38.05 on Tuesday.
