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| Undervalued
Investing Idea: National Home Health Care (NHHC) |
Published: February 8, 2006
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National Home Health Care (NHHC, $10.92)
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National
Home (NHHC)
Sector = Healthcare
Industry = Home Healthcare
Market Cap. = $62.1 million
Enterprise Value = $45.0 million
2005 Revenues = $98.5 million
2004 Gross Profit = $33.4 million
2004 Revenue Growth = +4.1%
Insider Ownership = 51.2%
Institutional Ownership = 23.9%
Insider Activity (ttm) = Neutral
Enterprise Value/EBITDA = 7.5 |
National Home Health Care
provides home healthcare and staffing services, primarily in New York,
Connecticut, and elsewhere throughout the Northeast. Through its
subsidiaries, the firm offers a wide array of home healthcare options,
including registered nurses and personal care aides, as well as
physical, occupational, and speech therapists. Additionally, the company
meets the temporary staffing needs of area healthcare facilities.
With a tiny market cap of $62 million and a float of just 2.3 million
shares, NHHC is rather illiquid, making it difficult for investors to
enter or exit a position. Because the stock is very thinly traded (with
an average daily volume of just 4,000 shares), there is often a wide
spread between the bid and ask prices. Despite these issues, though, I
believe the stock is worthy of additional consideration.
After posting healthy double-digit top-line growth rates from 2000 to
2003, National Home experienced a modest drop in 2004. The slowdown was
short-lived, however, and revenues have been climbing steadily since
then. In fact, the company recently reported record first-quarter
revenues of $26.3 million, a +9% increase on a year-over-year basis.
Management cited a recent acquisition and expansion of its services into
several neighboring states as the primary reasons for the improvement.
At the same time, though, administrative expenses associated with the
geographic expansion, as well as higher wages, took a bite out of net
income during the period. In general, NHHC's earnings have slipped lower
over the past several years as operating margins have contracted.
Nonetheless, the company has remained consistently profitable for more
than a decade.
Last year, shares of NHHC lost nearly one-fourth of their value. By
contrast, the average stock in the home healthcare industry delivered a
decent +6% gain. As a result, the shares are now sharply undervalued
relative to their peers, as well as the broader markets.
| |
NHHC |
Industry
Avg. |
| Price/Earnings |
16.9 |
22.1 |
| Price/Sales |
0.6 |
1.7 |
| Price/Book |
1.0 |
3.5 |
| Price/Cash
Flow |
12.9 |
23.2 |
After closely examining
approximately twenty home healthcare companies, I came to the conclusion
that NHHC is one of the most attractively valued in the group.
Currently, the shares sport a gross profit/enterprise value yield of 76%
-- more than double the 34% industry norm. Also, the firm's enterprise
value of $44 million is 30% below the company's $62 million market cap,
signifying one of the strongest balance sheets in the sector. With no
long-term debt and more than $17 million in cash on the books, NHHC
maintains an exceptionally strong current ratio of 7.6.
Though National Home does have institutional support from the likes of
AXA Advisors, Legg Mason, and small-cap specialists Royce &
Associates, less than one-fourth of the company's shares are owned by
institutions, meaning the thinly-traded stock could rise sharply if
large money managers suddenly became interested in the shares.
Finally, it should be noted that NHHC offers a generous annual dividend
of $0.30 per share, which works out to an above-average yield of 2.8%.
This should give value investors added incentive to wait on a rebound in
the shares.
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Important Note: The above article
was merely a small excerpt from a recent issue we sent to subscribers of
our premium value investing service -- Margin-of-Safety
Investing. In each issue of that newsletter, editors Nathan
Slaughter and Paul Tracy deliver an in-depth look at a variety of other deeply discounted
stocks that should provide investors with a solid margin of safety at
current prices. To receive your copy of our most recent issue of Margin-of-Safety
Investing, as well as other guidance similar to this twice per
month, you'll need to subscribe to this publication. To learn more,
please visit:
https://www.streetauthority.com/subscribe-msi.asp
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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