In the past 30 days, five analysts have boosted their EPS forecasts for this skilled nursing facility owner.
The Ensign Group, Inc. (ENSG)
From Investor Advisory Service
The Ensign Group owns and operates 248 skilled nursing facilities (SNFs). These facilities employ healthcare workers to rehabilitate and care for patients on a short-term basis, typically after hospitalization or another medical event. The company started in 1999 focusing on higher acuity, higher value SNF centers. It has grown mainly through acquisitions.
Management stresses the local nature of its business, as Ensign strives to marry the flexibility of a local business with the resources of a large enterprise. Local leaders are given a good amount of autonomy. Scale is particularly valuable when navigating the legal and regulatory complications that stem from serving government payors. The company also takes great pride in acquiring underperforming assets and improving them so that they achieve higher occupancy and earn higher reimbursements from payors. An ever-increasing regulatory burden, combined with Medicare’s evolving reimbursement schedules, have made it difficult for small operators to keep up with the changing times. This trend creates advantages for acquirers like Ensign Group.
47% of 2021 revenue came from Medicaid, 28% from Medicare, with the remaining split between managed care and other sources. Medicare and managed care payers are more generous than Medicaid. As is common across the healthcare landscape, Medicare and managed care rates subsidize Medicaid. Ensign has gravitated toward states where Medicaid reimbursement rates are relatively generous. Nonetheless, reimbursement is always a battle, and one of the greatest risks of investing in Ensign is the possibility that government reimbursement becomes less generous. During the pandemic, some states increased their Medicaid reimbursement rates, and Ensign has been a beneficiary. These subsidies are likely to go away in the second half of 2022, although management believes that this roll off will be matched by a decrease in costs, so overall profitability will not be much affected.
Federally-administered Medicare brings a different set of challenges. Medicare has been moving toward bundled payment schemes which require SNFs to share reimbursements with the upstream care providers. These agreements are tricky and can run afoul of other regulations that govern healthcare referral relationships. Bundling payments has created new frictions with longstanding business partners.
In October 2019, Ensign spun off most of its senior living facilities and other non-SNF assets into a new publicly-traded company called the Pennant Group (PNTG). We think this spinoff makes Ensign more investable because senior living is a less desirable industry. Ensign continues to own the real estate for most of Pennant’s facilities, which it has packaged into a captive real estate investment trust containing 93 total properties. The assessed value of this portfolio is $1 billion, although it is carried on the books at closer to $700 million. Part of Ensign’s acquisition strategy is to acquire real estate and improve it by improving the operations located on it. Ensign may eventually spin off this real estate, as it did in 2014 when it spun out CareTrust REIT (CTRE).
Parent Ensign’s stock has outperformed its two spinoff companies’, neither of which are followed in this newsletter. Shares are trading below their average valuation range based on trailing EPS of $3.42. Early 2022 guidance calls for EPS growth of 12% at the midpoint, and the company’s historical practice has been to guide conservatively, although some of the company’s outperformance can probably be attributed to a reimbursement environment that has evolved more slowly than feared.
We model 10% compound EPS growth, which we view as reasonably conservative. That is below the 10-year average of 19% and also below Wall Street analyst estimates of 15%. 10% compound EPS growth could produce EPS of $5.51 in five years. That figure combined with a high P/E of 23.1 generates a potential high price of $153. For a low price, we use $62.60, the product of trailing EPS of $3.42 and a low P/E of 18.3. On that basis, the upside/downside ratio is 4.9 to 1. The company pays a small dividend.
Doug Gerlach, InvestorAdvisoryService.com, 1-877-33-ICLUB, March 2022