This is the last part of The Motley Fool's annual "Stocks for Dad" special (Father's Day is June 15).
National Healthcare Corp. (AMEX: NHC)
Trading at $19.71as of June 12, 2003
Dad, I've got the perfect "buy what you know" stock for you: National HealthCare Corp. Not only is this company in your industry of expertise (long-term health care), it's also in your own backyard (just outside of Nashville, Tenn.). And, most importantly, it has value written all over it.
NHC has myriad operations across the long-term care (LTC) universe. The major revenue driver is the company's 78 long-term health-care centers (a.k.a. "nursing homes"), located in 11 states across the Southeast. But there's much more: It operates 32 home care programs, seven independent living centers, and 21 assisted-living centers; managed-care specialty medical units, Alzheimer's units, and a rehabilitation services company; and finally, accounting services for over 30 long-term health-care centers and three assisted living centers. You get the picture: NHC is in every corner of the LTC world.
But the LTC world, while full of opportunity as our population ages, has seen a great deal of turbulence in recent years. The Balanced Budget Act of 1997 resulted in material reductions of Medicare revenue to operators of LTC facilities. This contributed not only in sharp declines in public companies' market capitalizations, but also a wave of bankruptcies.
During 1999 and 2000, five of the nation's largest publicly held LTC providers filed for bankruptcy protection, as did at least four private chains of over 100 facilities. Only NHC and Manor Care(NYSE: HCR) avoided substantial operating losses during the last three years.
And more than just avoiding losses, NHC has been consistently profitable, posting only one loss in the past seven years. In addition, the company has achieved positive free cash flow in each of the past five years. That free cash flow has accumulated to a veritable cash hoard of $89.3 million (net of $27.9 million in debt).
Growth has also been good. In 2000, the company took a revenue hit after exiting the Florida market due to an inability to obtain adequate liability insurance in that state (and that state alone). But since then, revenue and profits have recovered substantially. In 2002, it posted near-record revenue and record profits.
Over the past year, including the first quarter of 2003, NHC generated revenue of $460.2 million and profits of $16.8 million. That's a rather slim profit margin of 3.7%. But accounting earnings don't tell the whole story. Free cash flow in the past year has amounted to $34.6 million, representing a much more respectable margin of 7.5%. And nothing about that cash flow was one-time in nature.
The only real threat I see to NHC is its exposure to some general liability lawsuits. The entire LTC industry has been subject to a high number of personal injury/wrongful death claims based on alleged negligence by nursing homes and their employees in providing care to residents.
As of March 31, 2003, NHC was named defendant to 102 such claims covering 1995 through 2002 (including 55 claims filed in Florida, where NHC has not operated or managed long-term care providers since Sept. 30, 2000). The company maintains insurance to cover these liabilities, but it is possible that claims against NHC could exceed its coverage limits and reserves, resulting in a material adverse effect.
Standing against that risk is a mouth-wateringly low valuation. Net of cash, NHC is valued at $148.4 million. That's a multiple of only 4.3 times free cash flow. By my calculations, even if it never grew at all -- only maintaining current free cash flow levels -- the stock is worth at least $30 (incorporating an 11% discount rate and assuming annual option dilution of 1.7%). With NHC currently trading at less than $20, there's a formidable margin of safety baked into the current price.
Finally, Dad, I think you'll be encouraged to know that NHC insiders own nearly 33% of the company. President W. Andrew Adams, who's been leading it since 1974, has a 9.4% equity stake and receives a base salary of only $25,000. Its culture is very much oriented towards pay-for-performance and encourages equity ownership at all levels of the corporation. You gotta love that.
Happy Father's Day!
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Matt Richey owns no shares in any companies mentioned in this article. The Motley Fool is investors writing for investors.
A Stock for Dad represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts.