Seeking Alpha: LHC Group Looking For M&A And Hospice Growth To Offset Reimbursement

Six months after I last wrote on LHC Group (LHCG), not all that much has changed in the home health provider world. While the industry got a partial reprieve in a one-year delay in Sustainable Growth Rate (or SGR) cuts, rebasing is still going to lead to significant revenue and margin pressure for many players. LHC Group is likely to fare relatively better due to its focus on rural locations and states that require Certificates of Need (or CONs), as well as its growing hospice business and desire to act as a consolidator in the space. LHC Group shares do still look undervalued on a long-term cash flow basis, but this remains a tough, tough industry right now.

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LHC Group Looking For M&A And Hospice Growth To Offset Reimbursement

Seeking Alpha: Weak Performance Continues To Plague Amedisys

If you can't beat 'em, give up. After several quarters where Amedisys (AMED) has missed analyst expectations, interim management has chosen to stop providing guidance for the timing being. Seeing as how the company needs to hire a new CEO (who likely will come in with a set of ideas about how to run/change the business) and is still in the midst of efforts to reduce costs and respond to reimbursement cuts, that's a reasonable move. Still, in the absence of information investors may choose to assume the worst.

It is difficult to feel all that cheerful or optimistic about this business. Costs per visit have been rising steadily, while revenue is pressured by reimbursement cuts and sluggish admissions. Amedisys is one of the largest operators in a fragmented industry likely to consolidate in response to ongoing reimbursement pressures, but a settlement with the government will stress the balance sheet and margins are very weak at present. The stock has been surprisingly strong for all of the company's travails, but I'd be hesitant to pay almost double the valuation (on a forward EV/EBITDA basis) for Amedisys over its peers even if this is a low period for the industry.

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Weak Performance Continues To Plague Amedisys

Seeking Alpha: LHC Group Appears Undervalued, But Times Are Getting Tougher

Having recently written about the significant headwinds pushing against Amedisys (AMED), I now turn to its smaller but more profitable rival LHC Group (LHCG). Like Amedisys, LHC Group is looking at an operating environment dominated by further cuts in Medicare reimbursement. Unlike Amedisys, though, I believe LHC Group may be able to leverage its strong network of hospital joint ventures and benefit from its exposure to rural locations and growing hospice revenue to offset this pressure.

Make no mistake, the next few years will not be easy ones for LHC Group. Although I believe that LHCG is likely to do better than most in terms of admissions and margins, the next couple of years could be quite challenging. I do also believe, though, that LHC Group is in a good position to take advantage of increasing stresses upon this industry and grow faster than many of its peers. These shares do appear to be undervalued today, but investors buying into the story need to appreciate that, outside of a takeover or go-private transaction, this one could take some time to work.

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LHC Group Appears Undervalued, But Times Are Getting Tougher

Seeking Alpha: LHC Group - Beaten Up, But Addressing A Huge Growth Market

The graying of America has been a theme in healthcare for at least the last 15 years, and I've seen analysts and investors apply it to med-tech companies like Johnson & Johnson (JNJ), insurance companies like UnitedHealth (UNH), and a host of other facility operators and service providers. It may be a trite theme at this point, but there is still an element of truth to it and patient investors may be able to ride LHC Group (LHCG) to its fruition.

A Growth Play In A Bad Neighborhood
It would be an understatement to say that home healthcare providers like LHC Group, Amedisys (AMED), Gentiva (GTIV), and Almost Family (AFAM) have been beaten up since 2010. Not only has the industry had to absorb cuts in reimbursement, but the entire industry has been under a regulatory cloud caused by accusations that these companies have fraudulently and illegally billed for unnecessary treatments.

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LHC Group - Beaten Up, But Addressing A Huge Growth Market

Seeking Alpha: A Battered Healthcare Play With Favorable Long-Term Demographics

There is no point in sugar-coating it - 2011 was a disastrous year for home health providers following a terrible 2010. The entire industry is under pressure as Congress cuts Medicare reimbursement and looks to implement new rules and regulations to address and punish prior wrong-doing, while the overall economy applies its own pressures. Although Amedisys (AMED) has been hit hard, patient investors willing to take on the risk may see a multi-year turnaround story unfold here.

What Amedisys Does
Amedisys is the largest publicly-traded provider of home health care and hospice services. Active in 45 states (but focused on the East/Southeast), Amedisys operates over 500 facilities offering skilled nursing, home health aides, physical/occupational therapy, and specialty nursing services.

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A Battered Healthcare Play With Favorable Long-Term Demographics