In the short run, stock market is just the voting machine. In the long run, it is the weighing machine. So how is AFAM fundamental, especially some key valuation ratios such as P/B, P/E and P/CF?
Glancing over the key ratios, AFAM seems to be very cheap at P/E only of 5.4, P/B of 0.7 and P/CF of 3.9, along with the ROE of 12.9% and ROA of 10.6%. Let’s dig deeper to see what’s behind the numbers.
Almost Family, incorporated in Delaware in 1985, is regionally known as the provider of home health services. It got service locations in different states such as Florida, Kentucky, New Jersey, Ohio, etc. The business got two reportable segments including Visiting Nurse Services (VN) and Personal Care Services (PC). The VN segment provides a range of Medicare-certified home health nursing services to patients in need of recuperative care, normally after a period of hospitalization or care in another type of impatient facility. The large revenue is generated on a per episode basis rather than a fee per visit or hourly basis, and 92% of VN revenue comes from Medicare program. The PC segment is to provide services such as personal care, medication management, meal preparation, etc in patients’ homes mainly based on as-needed, hourly basis. Around 69% of PC revenues are generated from Medicaid and other government programs.
So AFAM business relies very much on the government reimbursement programs, especially Medicare and Medicaid. So the business is quite vulnerable to possible legislative and administrative regulations. Budget cut-backs might make less people eligible for such programs, the amount of allowed reimbursements of the program. In addition, loss of certification or qualification under Medicare or Medicaid programs could materially affect the firm significantly.
How about its balance sheet position? The E/A is quite high at 82%, whereas employing no debt at all. And the thing to worry about is the big goodwill item, taking more than 53% of total asset of the company. The reason to have such big goodwill is because the company’s growth has been along with the acquisition of smaller home health care services provider or licenses. That is the common case in the industry, with other competitors such as Amedisys (AMED), Gentiva Health Services (GTIV) and LHC Group (LHCG). In regard of the stock market performance with those companies in the same industry, it has the same patterns with AFAM, AMED, GTIV and LHC, down significantly. And for the fundamental, AFAM seems to be the most conservative balance sheet in the industry group, GTIV got the most leverage balance sheet with the long-term debt of more than 64% of the total asset and GTIV’s D/A is around 88%. In general, the group got very consistent free cash flow as well as operating cash flow, especially AFAM and AMED.
What is interesting to note is AFAM and AMED fits nicely into the Magic Formula stock, within the holding of Joel Greenblatt. The only risk is for the Medicare and Medicaid government reimbursement program, so it is subject to policy risk. For any value investors, those two (especially AFAM with most conservative balance sheet) can be considered as the opportunity for upside and to be in the diversified value portfolio.