National HealthCare
Corporation (NHC)
Marnie Georges
Daniel Kleeman
Jason Mudrock
May 1, 2014
1
Agenda
• Screening process
• Company overview
• Recent financial performance
• Macroeconomic and industry overview
• Management focus
• Financial analysis
• Financial projections
• Valuation
• Recommendation
2
Our screening process
Major US
Exchanges
Analysts < 3
Revenue growth
since last
year > 3%
United States and
Canada
Market Cap
between $80MM
and $800MM
Net Income
Margin > 3%
Primary industry
classification is
not a financial
company
P/BV between 0.5
and 1.5
LTM P/E < 16
3
Business overview
Pharmacy
Rehabilitation
HomeCare
Independent
Living
Assisted
Living
Source: 2013 10-k.
Hospice
NHC
Skilled
Nursing
Centers
Accounting &
Financial
Services
4
Business capabilities
• Manage 69 skilled nursing
facilities with a total of 8,943
licensed beds
• Manages 7 centers for others
• Leases 35 centers from
National Health Investors
• Originally spun off from NHC
4
4
2
3
13
78
3
31
2
10
Source: 2013 10-k.
5
Market power analysis
Strengths
• Strong profitability
• Ability to renew leased facilities
• All managed centers are
Medicare certified
Opportunities
• Aging population
• Increasing insurance coverage
Source: 2013 10-k.
Weaknesses
• Dependence on Medicare and
Medicaid
• Excess capacity
Threats
• Heavy industry regulation
• Wrongful death lawsuits
6
Recent financial performance
Revenue
• Solid yearly growth overall
• Year-to-year variability from
business risks
• 2013 benefitted from opening
new facilities
• Several still under construction
• Profitability can vary with risk
reserves
$800,000
$780,000
$760,000
$740,000
$720,000
$700,000
$680,000
$660,000
$640,000
$620,000
$600,000
2009
2010
2011
2012
2013
2012
2013
Net Income
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$2009
Sources: 2013 10-k, 2012 10-k, 2011 10-k, 2010 10-k.
2010
2011
7
Stock market performance
Sources: Yahoo! Finance.
8
Industry drivers
Aging Population
Federal Funding for
Medicaid & Medicare
Increased Private
Insurance Ownership
Adults aged 65+
55
Millions
50
45
40
35
30
Federal Funding
1200
1000
800
600
400
200
0
Private Insurance Owners
230
225
220
215
210
205
200
2013 2015 2017 2019
Sources:
1. “Number of adults aged 65 and older.“ IBISWorld Business Environment Profiles. IBISWorld. Jan. 2014.
2. “Federal funding for Medicare and Medicaid.“ IBISWorld Business Environment Profiles. IBISWorld. Jan. 2014.
3.. “Number of people with private health insurance.“ IBISWorld Business Environment Profiles. IBISWorld. Jan. 2014.
9
Porter’s Five Forces
Sources:
Rivalry Among
Existing
Competitors
Bargaining
Power of Buyers
Bargaining Power
of Suppliers
Entry of New
Competitors
•Numerous
competitors and
alternatives
available to buyers
•Alternatives to
skilled nursing
•Consumer choice
limited by
insurance plans
•Dominant medical
suppliers serve all
competitors
•Schools with top
nursing talent
attract multiple
industry players
•May customize
facilities and use
multiple vendors
for common
goods/services
•High barriers
include specified
skills, capital
expenditures, and
government
regulations
•Necessary payor
relationships deter
entrants
•Numerous players
competing in
growing industry
for limited payout
funds
•Branding becomes
important due to
sensitive nature of
services
performed
HIGH
MEDIUM
LOW
HIGH
1. Diment, Dmitry. “Nursing Care Facilities in the US.” IBISWorld Industry Report. IBISWorld. Feb. 2014.
2. Diment, Dmitry. “Elderly & Disabled Services in the US.” IBISWorld Industry Report. IBISWorld. Feb. 2014.
3. Phillips, Jocelyn. “Specialty Hospitals in the US.” IBISWorld Industry Report. IBISWorld. Feb. 2014.
Threat of
Substitutes
•Low use of
alternative
medicines and
healing
•Skilled care is
difficult to
replicate
LOW
10
Health insurance overview
Private
Insurance
Affordable
Care Act
Medicare
& Medicaid
Sources:
1. “HMOs.” Illinois Department of Insurance. Jun. 2009.
2. “Preferred Provider Organization (PPO) Plans.” Medicare.gov.
3. About the Law.” HHS.gov/HealthCare. U.S. Department of Health & Human Services.
11
Management focus
Improve occupancy rates with existing facilities
Diversify revenue streams to include more private payors
Open facilities currently under construction in a timely manner
Source: 2013 10-k.
12
Financial analysis
Liquidity Ratios
Current Ratio
Quick Ratio
Cash Ratio
2009
1.41
1.38
0.64
2010
1.44
1.40
0.36
2011
1.68
1.64
0.52
2012
1.82
1.79
0.34
2013
1.75
1.72
0.38
2011
10.25%
8.40%
7.51%
10.62%
2012
9.03%
7.79%
6.41%
9.04%
2013
9.18%
8.19%
6.59%
9.39%
2011
0.29
0.42
178.99
2012
0.29
0.41
150.97
2013
0.30
0.43
218.77
Profitability Ratios
Operating Profit Margin
Net Margin
ROA
ROE (Book Value)
2009
7.66%
5.95%
5.08%
7.62%
2010
8.07%
7.31%
6.35%
9.39%
Solvency Ratios
Debt/Assets
Debt/Equity
Interest Coverage
2009
0.33
0.50
72.05
2010
0.32
0.48
113.33
13
Financial analysis
Activity Ratios
A/R Turnover
Fixed Asset Turnover
Total Asset Turnover
2009
10.84
1.57
0.85
2010
9.35
1.65
0.87
2011
11.10
1.80
0.89
2012
9.89
1.81
0.82
2013
9.23
1.73
0.80
DuPont Analysis
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
2009
59.20%
131.15%
7.66%
0.85
1.50
7.62%
2010
65.08%
139.26%
8.07%
0.87
1.48
9.39%
2011
65.39%
125.34%
10.25%
0.89
1.42
10.62%
2012
63.44%
136.09%
9.03%
0.82
1.41
9.04%
2013
63.24%
141.10%
9.18%
0.80
1.43
9.39%
2011
16.40%
11.63%
2012
14.34%
10.09%
2013
13.93%
10.34%
Dupont Analysis
160.00%
1.52
140.00%
1.50
120.00%
1.48
100.00%
1.46
Tax Burden
Interest Burden
Operating Profit
Margin
80.00%
1.44
60.00%
1.42
40.00%
1.40
ROE
20.00%
1.38
Leverage
0.00%
Asset Turnover
1.36
2009 2010 2011 2012 2013
Greenblatt Ratios
EBIT/Tangible Assets
EBIT/TEV
2009
10.66%
8.71%
2010
11.94%
8.26%
14
Discount rate
WACC Calculation
Capital Structure
Cost of Equity
Debt-to-Total Capitalization
Preferred Equity-to-Total Capitalization
29.8%
Risk-free Rate(1)
2.75%
22.8%
Market Risk Premium
6.51%
Common Equity-to-Total Capitalization
47.4%
Levered Beta
Total
100.0%
Cost of Equity
Cost of Debt
Cost of Debt
Tax Rate
After-tax Cost of Debt
5.25%
36.73%
3.32%
Return to Shareholders
70.0%
8.78%
30.0%
9.75%
WACC
6.77%
Discount Rate
Cost of Preferred Stock
10.17%
Weighted Cost of Equity
Business Risk Premium
Cost of Preferred Stock
1.14
3.50%
10.27%
5.09%
15
Projections
Revenue (% Growth Rate)
Historical figures
2009A
Net patient revenues
Other revenues
2010A
2011A
2012A
2013A
6.76%
7.81%
-1.41%
4.32%
10.48%
1.28%
-3.70%
-4.49%
Revenue (% Growth Rate)
Net patient revenues
Other revenues
Forecast Figures
2014P
2015P
2016P
2017P
2018P
4.00%
7.00%
1.00%
5.00%
3.00%
-2.00%
1.00%
-4.00%
0.50%
-0.50%
16
Comparable valuation
Comparables
LHC Group, Inc.
Addus HomeCare Corporation
AMN Healthcare Services
Almost Family Inc.
Five Star Quality Care Inc.
Enterprise Value /
Ticker
LHCG
ADUS
AHS
AFAM
FVE
Min
Median
Mean
Max
National HealthCare Corporation
Source: Yahoo! Finance.
NHC
Share
Shares
Market
Price Outstanding Capitalization
20.78
17.79
$
369.7
21.62
10.84
$
234.4
12.48
46.40
$
579.0
21.47
9.41
$
202.0
4.83
48.61
$
234.8
4.83
20.78
16.24
21.62
9.41
17.79
26.61
48.61
$
$
$
$
202.0
234.8
324.0
579.0
54.73
14.21
$
777.7
Debt/ Enterprise
Equity
Value
7.56%
393.0072
0.00% 218.86066
73.22% 722.90604
26.05%
249.9247
15.11% 249.17879
0.00% 218.86066
15.11%
249.9247
24.39% 366.775478
73.22% 722.90604
1.45%
771.45222
Multiple
Price
P/E
P/BV
EV/EBITDA
EV/Revenue
$ 75.79
$ 50.00
$ 70.64
$ 32.40
Price
$
Rev. EBITDA
0.61
7.00
0.82
12.42
0.71
9.10
0.70
14.36
0.23
5.89
Price /
BV
1.21
2.06
2.64
0.93
0.74
2013A
EPS
Actual
15.98
21.41
18.09
23.59
19.59
0.23
0.70
0.62
0.82
5.89
9.10
9.75
14.36
0.74
1.21
1.52
2.64
15.98
19.59
19.73
23.59
1.00
6.41
1.49
14.14
Growth Rates
2014P
EPS
1 Year
Est.
Rev.
EBITDA
16.18 2.98% -10.50%
20.63 8.85%
-0.44%
17.12 6.07% 17.70%
15.94 4.49% -43.51%
24.16 12.55%
2.03%
15.94 2.98%
17.12 6.07%
18.81 6.99%
19.46 12.55%
0.00
3.79%
Profitability
Margins
EBITDA
8.72%
6.63%
7.85%
4.86%
3.87%
NI
3.47%
7.20%
3.25%
2.30%
0.43%
-43.51%
-0.44%
-6.94%
17.70%
3.87%
6.63%
6.39%
8.72%
0.43%
3.25%
3.33%
7.20%
7.85%
13.80%
8.39%
Weight
30%
30%
30%
10%
62.17
17
Projections
Income Statement (% of Sales unless noted)
Salaries, wages and benefits
Other operating
Facility rent
Depreciation and amortization (% of PPE)
Interest (% of debt)
Non-operating income
Income Tax (% of EBT)
Dividends to Preferred Stockholders (growth)
Income Statement (% of Sales unless noted)
Salaries, wages and benefits
Other operating
Facility rent
Depreciation and amortization (% of PPE)
Interest (% of debt)
Non-operating income
Income Tax (% of EBT)
Dividends to Preferred Stockholders (growth)
2009A
2010A
2011A
2012A
2013A
55.07%
27.95%
5.55%
5.95%
-3.42%
2.49%
40.80%
55.54%
27.34%
5.28%
6.22%
-2.45%
3.24%
34.92%
-
55.44%
25.43%
5.14%
6.73%
-2.23%
2.66%
34.61%
-0.02%
56.10%
25.79%
5.17%
7.08%
-2.21%
3.32%
36.56%
-
57.49%
24.71%
5.00%
6.25%
-1.44%
3.81%
36.76%
-
2014P
2015P
2016P
2017P
2018P
58.00%
24.50%
4.90%
7.50%
-1.50%
4.00%
36.50%
0.00%
58.00%
24.00%
4.90%
7.00%
-1.25%
4.20%
36.50%
0.00%
58.50%
23.50%
4.80%
6.50%
-1.10%
4.40%
36.50%
0.00%
58.50%
23.00%
4.80%
6.00%
-1.00%
4.60%
36.50%
0.00%
59.00%
22.50%
4.70%
5.50%
-0.90%
4.80%
36.50%
0.00%
18
DCF
2014P
63,723.14 $
Net Income
$
2016P
2017P
77,757.96 $ 87,585.49 $
2018P
93,547.33
Plus: D&A
Less: CapEx
Less: Change in Working Capital:
$ 34,945.05 $ 33,267.68 $ 31,663.71 $ 29,958.74 $
$ (46,593.40) $ (42,772.74) $ (38,970.72) $ (34,951.86) $
$
4,051.88 $
5,536.42 $
7,204.14 $ 4,570.45 $
28,148.73
(30,707.71)
2,834.05
Unlevered FCF
$
48,022.92
$
2015P
74,390.21 $
59,348.74
$
63,246.81
$ 78,021.93
Terminal Value
Terminal Value Assumption
Terminal Growth
Terminal Value
Discount Rate
2.8%
1,212,885
10.272%
$
88,154.30
$ 1,212,885.45
Calculation of Implied Share Price
Implied Enterprise Value
Less Debt
Plus Cash
Implied Market Cap
Implied Share Price
$
$
$
$
$
990,233
10,000
980,233
58.70
19
DCF
Discount Rate
Share Price Sensitivity
Terminal Growth Rate
8.3%
9.3%
10.3%
11.3%
12.3%
2.3%
$75.80
$64.30
$55.70
$49.03
$43.72
2.6%
$78.61
$66.27
$57.15
$50.14
$44.57
2.8%
$81.67
$68.40
$58.70
$51.30
$45.48
3.1%
$85.04
$70.70
$60.35
$52.54
$46.43
3.3%
$88.73
$73.19
$62.12
$53.85
$47.43
20
Price Weighting
Method
DCF
Comps
Combined
Price
$ 58.70
$ 62.17
$ 60.44
Weight
50%
50%
21
Performance relative to comps
Source: Yahoo! Finance.
22
Recommendation
Buy
•Market Price - $54.73 as of 4/30 market
close
•Buy 100 shares with a limit order @ 54.50
•$5,450 position size
•Limit order will be good until cancelled
23