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Almost Family: The Magic Formula Stock is getting cheaper and cheaper

December 11, 2011 | About:
Year to date, AFAM stock has been decreasing continuously, from around $40 at the beginning of the year and now it is fluctuating around $14/share, the decline of 65%. With any value investors, such a significant depression in the stock price is always worth taking a look to seek out potential opportunities.

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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?

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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.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.9/5 (15 votes)

Comments

skyaboveyou
Skyaboveyou - 2 years ago


I notice the company keeps issuing shares (an increase of over 1% in the last 12 months and of over 100% in the last 5 years)... this doesn't seem like a company that gives appropriate value to it's stock... aare they issuing shares to buy those small companies you refer to (and that would then both explain why they have no debt and also mean that maybe there's no problem if they are issuing those shares at a bargain compared to the price they are paying, but somehow I don't believe it that much since when using shares company usually don't pay attention to the price), are they issuing shares to pay the management (which also isn't that good) or are they doing both?
ken_hoang
Ken_hoang - 2 years ago
For issuing shares, it was about paying what price to get what value? If % shares issued to gain much better real EPS, then it should be encouraged. AFAM got 5 million shares in 2003, while EPS was 0.25 at that time, and recently it was 9 million shares, but EPS got to $3.24, so it was not the bad decision of issuing shares.

Besides, it would dilute the existing shareholders, not the new one. So if with the current share price, current number of shares at the very cheap valuation, that should be okay.

However, the worrisome as I mentioned in my AMED analysis comment is the level of goodwill, AMED and GTIV has taken goodwill writeoff, bringing goodwill to lower level, but not the AFAM yet. Investors who are interested in AFAM should consider this factor seriously, in order to avoid huge writeoff in the near future.

McFlipp
McFlipp - 2 years ago
How is the write-down a problem? It's only an accounting loss not an actual outflow of cash.
ken_hoang
Ken_hoang - 2 years ago
Hi McFlipp: The write-down is not the actual outflow of cash, but 1. short-term, it would affect the quarter earnings of the write-down, and for sure the share price will suffer further. 2. it bring the goodwill item down (might be to 0).

Goodwill is the accounting figure as well, but it help increase the level of asset, and might contain so called "water". Whenever I see the high goodwill level in the total assets, that is not very sustainable.

McFlipp
McFlipp - 2 years ago
I always regard goodwill as an accounting gimmick. All of the things you mention don't affect the actual business or cash position. The further drop in share price should be a nice possibility to accumulate some more shares (note: I don't have a position in AFAM).

A value investor should see through this and grab this opportunity in my opinion instead of only looking at the headline earnings (net income in this case that indeed will be impacted) like most other market participants.
donli
Donli premium member - 2 years ago
test
chentao1006
Chentao1006 premium member - 2 years ago
Good article!
22482494
22482494 - 2 years ago
Thank you!

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