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National HealthCare Corporation (NHC)Marnie Georges
Daniel Kleeman
Jason Mudrock
May 1, 2014
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Agenda
• Screening process• Company overview• Recent financial performance• Macroeconomic and industry overview• Management focus• Financial analysis• Financial projections• Valuation• Recommendation
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Our screening process
Major US Exchanges
United States and Canada
Primary industry
classification is not a financial
company
P/BV between 0.5 and 1.5
Market Cap between
$80MM and $800MM
Analysts < 3
Revenue growth since
last year > 3%
Net Income Margin > 3%
LTM P/E < 16
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Business overview
NHC Skilled Nursing Centers
Assisted Living
Independent Living
Rehabilitation
Pharmacy
HomeCare
Hospice
Accounting & Financial Services
Source: 2013 10-k.
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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
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3
78
3 2
2
31
10
4
4
Source: 2013 10-k.
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Market power analysis
Strengths• Strong profitability• Ability to renew leased
facilities• All managed centers are
Medicare certified
Threats• Heavy industry regulation• Wrongful death lawsuits
Opportunities• Aging population• Increasing insurance
coverage
Weaknesses• Dependence on Medicare
and Medicaid• Excess capacity
Source: 2013 10-k.
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Recent financial performance
Sources: 2013 10-k, 2012 10-k, 2011 10-k, 2010 10-k.
$600,000 $620,000 $640,000 $660,000 $680,000 $700,000 $720,000 $740,000 $760,000 $780,000 $800,000
2009 2010 2011 2012 2013
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
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
2009 2010 2011 2012 2013
Net Income
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Stock market performance
Sources: Yahoo! Finance.
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Industry driversAging
Population
2009
2011
2013
2015
2017
2019
30
35
40
45
50
55
Adults aged 65+
Million
s
2013
2014
2015
2016
2017
2018
0200400600800
10001200
Federal Funding
Federal Funding for Medicaid & Medicare
Increased Private
Insurance Ownership
2013
2015
2017
2019
200205210215220225230
Private Insurance Owners
5.9% CAGR
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.
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Porter’s Five Forces
HIGH
Bargaining Power of Buyers
• Numerous competitors and alternatives available to buyers
• Alternatives to skilled nursing
• Consumer choice limited by insurance plans
Bargaining Power of Suppliers
• 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
Entry of New Competitors
• High barriers include specified skills, capital expenditures, and government regulations
• Necessary payor relationships deter entrants
Rivalry Among Existing
Competitors• Numerous
players competing in growing industry for limited payout funds
• Branding becomes important due to sensitive nature of services performed
Threat of Substitutes
• Low use of alternative medicines and healing
• Skilled care is difficult to replicate
MEDIUM LOW HIGH LOW
Sources: 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.
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Health insurance overview
Private Insuran
ce
Affordable Care
ActMedicar
e & Medicai
dSources: 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.
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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.
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Financial analysis
2009 2010 2011 2012 2013Current Ratio 1.41 1.44 1.68 1.82 1.75 Quick Ratio 1.38 1.40 1.64 1.79 1.72 Cash Ratio 0.64 0.36 0.52 0.34 0.38
2009 2010 2011 2012 2013Operating Profit Margin 7.66% 8.07% 10.25% 9.03% 9.18%Net Margin 5.95% 7.31% 8.40% 7.79% 8.19%ROA 5.08% 6.35% 7.51% 6.41% 6.59%ROE (Book Value) 7.62% 9.39% 10.62% 9.04% 9.39%
2009 2010 2011 2012 2013Debt/Assets 0.33 0.32 0.29 0.29 0.30 Debt/Equity 0.50 0.48 0.42 0.41 0.43 Interest Coverage 72.05 113.33 178.99 150.97 218.77
Liquidity Ratios
Profitability Ratios
Solvency Ratios
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Financial analysis
1.36
1.38
1.40
1.42
1.44
1.46
1.48
1.50
1.52
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
160.00%
2009 2010 2011 2012 2013
Dupont Analysis
Tax Burden
Interest Burden
Operating ProfitMargin
Asset Turnover
ROE
Leverage
2009 2010 2011 2012 2013A/R Turnover 10.84 9.35 11.10 9.89 9.23 Fixed Asset Turnover 1.57 1.65 1.80 1.81 1.73 Total Asset Turnover 0.85 0.87 0.89 0.82 0.80
2009 2010 2011 2012 2013Tax Burden 59.20% 65.08% 65.39% 63.44% 63.24%Interest Burden 131.15% 139.26% 125.34% 136.09% 141.10%Operating Profit Margin 7.66% 8.07% 10.25% 9.03% 9.18%Asset Turnover 0.85 0.87 0.89 0.82 0.80 Leverage 1.50 1.48 1.42 1.41 1.43 ROE 7.62% 9.39% 10.62% 9.04% 9.39%
2009 2010 2011 2012 2013EBIT/Tangible Assets 10.66% 11.94% 16.40% 14.34% 13.93%EBIT/TEV 8.71% 8.26% 11.63% 10.09% 10.34%
Greenblatt Ratios
DuPont Analysis
Activity Ratios
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Discount rateWACC Calculation
Capital Structure
Debt-to-Total Capitalization 29.8%
Preferred Equity-to-Total Capitalization 22.8%Common Equity-to-Total Capitalization 47.4%
Total 100.0%
Cost of Debt
Cost of Debt 5.25%
Tax Rate 36.73%
After-tax Cost of Debt 3.32%
Cost of Preferred Stock
Cost of Preferred Stock 5.09%
Cost of Equity
Risk-free Rate(1) 2.75%
Market Risk Premium 6.51%
Levered Beta 1.14
Cost of Equity 10.17% 70.0%
Return to Shareholders 8.78% 30.0%
Weighted Cost of Equity 9.75%
WACC 6.77%
Business Risk Premium 3.50%
Discount Rate 10.27%
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Projections
Revenue (% Growth Rate)
2009A 2010A 2011A 2012A 2013A
Net patient revenues 6.76% 7.81% -1.41% 4.32%Other revenues 10.48% 1.28% -3.70% -4.49%
Historical figures
Revenue (% Growth Rate)
2014P 2015P 2016P 2017P 2018P
Net patient revenues 4.00% 7.00% 1.00% 5.00% 3.00%Other revenues -2.00% 1.00% -4.00% 0.50% -0.50%
Forecast Figures
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Comparable valuation
Source: Yahoo! Finance.
Comparables Enterprise Value / Price / Growth Rates Profitability
2013A 2014PShare Shares Market Debt/ Enterprise EPS EPS 1 Year Margins
Ticker Price Outstanding Capitalization Equity Value Rev. EBITDA BV Actual Est. Rev. EBITDA EBITDA NILHC Group, Inc. LHCG 20.78 17.79 369.7$ 7.56% 393.0072 0.61 7.00 1.21 15.98 16.18 2.98% -10.50% 8.72% 3.47%Addus HomeCare Corporation ADUS 21.62 10.84 234.4$ 0.00% 218.86066 0.82 12.42 2.06 21.41 20.63 8.85% -0.44% 6.63% 7.20%AMN Healthcare Services AHS 12.48 46.40 579.0$ 73.22% 722.90604 0.71 9.10 2.64 18.09 17.12 6.07% 17.70% 7.85% 3.25%Almost Family Inc. AFAM 21.47 9.41 202.0$ 26.05% 249.9247 0.70 14.36 0.93 23.59 15.94 4.49% -43.51% 4.86% 2.30%Five Star Quality Care Inc. FVE 4.83 48.61 234.8$ 15.11% 249.17879 0.23 5.89 0.74 19.59 24.16 12.55% 2.03% 3.87% 0.43%
Min 4.83 9.41 202.0$ 0.00% 218.86066 0.23 5.89 0.74 15.98 15.94 2.98% -43.51% 3.87% 0.43%Median 20.78 17.79 234.8$ 15.11% 249.9247 0.70 9.10 1.21 19.59 17.12 6.07% -0.44% 6.63% 3.25%Mean 16.24 26.61 324.0$ 24.39% 366.775478 0.62 9.75 1.52 19.73 18.81 6.99% -6.94% 6.39% 3.33%Max 21.62 48.61 579.0$ 73.22% 722.90604 0.82 14.36 2.64 23.59 19.46 12.55% 17.70% 8.72% 7.20%
National HealthCare Corporation NHC 54.73 14.21 777.7$ 1.45% 771.45222 1.00 6.41 1.49 14.14 0.00 3.79% 7.85% 13.80% 8.39%
Multiple Price Weight
P/E 75.79$ 30%P/BV 50.00$ 30%EV/EBITDA 70.64$ 30%EV/Revenue 32.40$ 10%
Price 62.17$
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ProjectionsIncome Statement (% of Sales unless noted) 2009A 2010A 2011A 2012A 2013A
Salaries, wages and benefits 55.07% 55.54% 55.44% 56.10% 57.49%Other operating 27.95% 27.34% 25.43% 25.79% 24.71%Facility rent 5.55% 5.28% 5.14% 5.17% 5.00%Depreciation and amortization (% of PPE) 5.95% 6.22% 6.73% 7.08% 6.25%Interest (% of debt) -3.42% -2.45% -2.23% -2.21% -1.44%Non-operating income 2.49% 3.24% 2.66% 3.32% 3.81%Income Tax (% of EBT) 40.80% 34.92% 34.61% 36.56% 36.76%Dividends to Preferred Stockholders (growth) - -0.02% - -
Income Statement (% of Sales unless noted) 2014P 2015P 2016P 2017P 2018P
Salaries, wages and benefits 58.00% 58.00% 58.50% 58.50% 59.00%Other operating 24.50% 24.00% 23.50% 23.00% 22.50%Facility rent 4.90% 4.90% 4.80% 4.80% 4.70%Depreciation and amortization (% of PPE) 7.50% 7.00% 6.50% 6.00% 5.50%Interest (% of debt) -1.50% -1.25% -1.10% -1.00% -0.90%Non-operating income 4.00% 4.20% 4.40% 4.60% 4.80%Income Tax (% of EBT) 36.50% 36.50% 36.50% 36.50% 36.50%Dividends to Preferred Stockholders (growth) 0.00% 0.00% 0.00% 0.00% 0.00%
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DCF2014P 2015P 2016P 2017P 2018P
Net Income 63,723.14$ 74,390.21$ 77,757.96$ 87,585.49$ 93,547.33$
Plus: D&A 34,945.05$ 33,267.68$ 31,663.71$ 29,958.74$ 28,148.73$ Less: CapEx (46,593.40)$ (42,772.74)$ (38,970.72)$ (34,951.86)$ (30,707.71)$ Less: Change in Working Capital: 4,051.88$ 5,536.42$ 7,204.14$ 4,570.45$ 2,834.05$
Unlevered FCF 48,022.92$ 59,348.74$ 63,246.81$ 78,021.93$ 88,154.30$
Terminal Value 1,212,885.45$
Terminal Growth 2.8%Terminal Value 1,212,885
Discount Rate 10.272%
Terminal Value Assumption Calculation of Implied Share PriceImplied Enterprise Value 990,233$ Less Debt 10,000$ Plus Cash -$ Implied Market Cap 980,233$
Implied Share Price 58.70$
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DCF
Share Price SensitivityTerminal Growth Rate
2.3% 2.6% 2.8% 3.1% 3.3%8.3% $75.80 $78.61 $81.67 $85.04 $88.739.3% $64.30 $66.27 $68.40 $70.70 $73.19
10.3% $55.70 $57.15 $58.70 $60.35 $62.1211.3% $49.03 $50.14 $51.30 $52.54 $53.8512.3% $43.72 $44.57 $45.48 $46.43 $47.43
Dis
coun
t Ra
te
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Price Weighting
Method Price Weight
DCF 58.70$ 50%Comps 62.17$ 50%Combined 60.44$
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Performance relative to comps
Source: Yahoo! Finance.
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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
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