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Addus HomeCare: Weathering The Health Care Maelstrom – Addus …

Thesis:

Seniors 65 or older constitute 15% of the US population and by 2050 that percentile will jump to 22%. Those requiring senior caretaking services overwhelmingly wish to remain in their own homes. There is now, and will increasingly be with time, demand by seniors to have their caretaking needs met. Addus HomeCare (ADUS) represents a quality investment that seeks to address exactly these needs now, in the future, and will benefit from the rise in demand with the passage of time.

Company Overview:

Addus supports 34,000 seniors, chronically ill, or disabled already receiving care in 111 locations across 24 states, representing a large organization given the highly fragmented 56-billion-dollar home care industry. These services include non-medical activities of daily living that are critical for these adults to remain independent. There are 18,000 licensed home and community service agencies in the US, of which Addus is one of the largest.

Opportunities:

Recurring revenue offers the stability that makes personal care businesses attractive. These care contracts aren’t brief. Addus tracks their average duration of services, as per 1Q17 numbers, to 26 months, with 56.9 hours per month billed, at $17.52 per hour.

The goal of adults that help their parents with this in-home care is to ensure that their loved ones stay out of a nursing home for as long as possible. These efforts, in fact, do have meaningfully positive results. The probability of being placed in a nursing home dipped 46% for those who were given this type of personal care, from 20% to about 11% of the sample size.

This care many times not only serves to increase one’s quality of life but also saves money. Nursing homes fees add up to oftentimes over $200 per day, even for a semi-private room.

While organic expansion is going well, Addus is not afraid of growth by acquisition. Between 2013 and 2016 Addus took on 7 acquisitions, the largest of which in 2016 added $52.7 million to net service revenues.

Most of the adults that are taking on care dual-qualify for both Medicare and Medicaid. States are increasingly going for managed-care organizations to take care of aging citizens, due to the increased efficiency and costs compared to nursing home care. As of mid-2016, some 39 states contracted with such organizations and that number is expected to rise.

Addus is primarily in the business of contracting with the state and federal governments.

The seismic changes expected to be carved into the ACA and government healthcare as a whole represents uncertainty for Addus. That being said, Addus is addressing a very basic need-to keep seniors in their homes, which ultimately saved money across the board-and, as such, I don’t see changes overwhelmingly affecting Addus’ business model. The pressure being assessed is on the hourly rate and Addus’ ability maintain their margins. A full 61% of the Addus workforce is represented by SEIU, a national union. This is in contrast with many in-home workers with simply work out an informal arrangement with the employing senior. This puts Addus at a distinct disadvantage that must be overcome. Further, wage pressures upwards will increasingly put a strain on Addus’ ability to keep their cost down for budget conscious seniors and cost-conscious government agencies.

Stock metrics:

Addus has met or beat the analyst earnings estimates for the last four quarters with a “strong buy” sentiment prevailing among those forecasting future growth. As a result, from June 2016 to now the stock has doubled.

ADUS data by YCharts

Revenue growth hovers around 7% and is projected to follow a similar trajectory.

Conclusion:

As Americans get older, Addus stands well-positioned to serve their needs as a market leader with strong relationships with governmental organizations that fund their services. Addus can continue to face the political headwinds which may choppy the waters of their reimbursement streams with the understanding that their services are a preferred preventative measure to really doling out funds to pay for nursing home care.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Article source: https://seekingalpha.com/article/4088771-addus-homecare-weathering-health-care-maelstrom

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