Mertz Taggart follows the publicly traded home-based care companies and reports on their earnings calls each quarter. As a group, public company performance and share price serve as a proxy for industry performance and investor sentiment, respectively. Historically seen as the “ultimate consolidators”, the publicly traded home-based care trading multiples have a downstream effect on lower middle market home-based care M&A.
Addus Homecare (Nasdaq: ADUS)
Highlights
Addus reiterated its position towards CMS's Proposed Medicaid Access Rule and expects a final rule to be published around late Q1 2024 and early Q2 2024. There is still uncertainty as to whether the 2,000+ comments that CMS received will cause a material change between the proposed and final rule.
Addus grew significantly during Q3 2023 – revenue ($270.7M) and EBITDA ($27.6M) increased 12.6% and 21.1%%, respectively, over Q3 2022. The labor market continues to show signs of improvement. As a result, Addus increased hires per business day from 81 in Q2 2023 to 84 in Q3 2023.
Although the company has had strong growth in its fundamentals in 2023, its stock price hasn't followed (-12.10%). This is because ~75% of Addus' revenue comes from the personal care segment, which is compromised by CMS's Proposed Medicaid Access Rule. If the final rule is materially different than the proposed rule, in a beneficial way, we should see the stock price rise in short order.
Key Financial Figures
M&A Activity
Over the last two quarters Addus slowed down its acquisition activity due to uncertainty around the Home Health Proposed Rule for 2024 and the Proposed Medicaid Access Rule. Home health acquisitions might pick up after the final home health rule, published in 11/1/2023, was not a negative surprise.
“Over the past few months, we have continued to see limited strategic opportunities in both personal care and home health due to the reimbursement uncertainty that exists in each of these segments. As we have more clarity around these particular issues, we believe that we will start to see increasing acquisition opportunities in these segments that will meet our strategic objectives.”
- Dirk Allison, Chairman and Chief Executive Officer
Guidance
Addus expects continued growth across all operating segments for Q4 2023:
“Looking ahead to the fourth quarter, we still expect our growth rate in personal care to most likely be above that 3% to 5% range” and “in the clinical services, we've talked about we've seen some sequential improvement from Q2 into Q3. I think we would expect and anticipate to see continued positive momentum there”
- Brian Poff, CFO
Aveanna Healthcare (Nasdaq: AVAH)
Highlights
Aveanna continued its positive growth trend during Q3 2023 – revenue increased 7.9%, gross profit 9.4%, and adjusted EBITDA 46.2% over the prior year period. This was mainly due to “the improved payer rate environment as well as cost reduction efforts” said Jeff Shaner, CEO.
Strong demand for the company’s services remains, but the primary challenge in meeting that demand is still the labor market. However, Aveanna begins to see “early signs of improvement in the caregiver labor market”, said Shaner. We could see accelerated top-line growth over the next few quarters if the labor market continues to improve.
YTD 2023, the company has successfully achieved reimbursement rate increases in 19 states of its private duty services (PDS) segment (eight of which have seen double-digit increases). Altogether, this represents 55% of the segment’s revenue or 44% of the company’s revenue for Q3 2023.
In addition to rate increases, Aveanna has been successful at shifting care volumes towards preferred payers in its PDS and home health segments. YTD 2023 PDS preferred payer volumes increased from 10% to 17% and home health episodic payer mix increased from 63% to 75%.
Overall, Aveanna has had a successful 2023 year, in which the company has also set strong foundational bases to continue to grow in 2024:
“We are encouraged by our 2023 rate increases and subsequent recruiting results, and our business is beginning to demonstrate signs of recovery”
- Jeff Shaner, CEO
Key Financial Figures
M&A Activity
There are still no signs of a growth-through-acquisition strategy. This is likely due to the company’s high leverage ratio and the uncertainty around CMS’s proposed rules.
Guidance
Aveanna is increasing 2023’s initial guidance:
“As it relates to our refreshed outlook for the year, based on the strength of our first 9 months results and the continued rate improvement, we are comfortably raising our full year revenue guidance to a range of $1.87 billion to $1.88 billion and an adjusted EBITDA guidance range of $134 million to $137 million”
- Jeff Shaner, CEO
The Pennant Group, Inc. (Nasdaq: PNTG)
Highlights
Pennant reported strong operational results for Q3 2023 – revenue increased $21.8 million or 18.5%, adjusted EBITDA increased $3.0 million or 37.8%, and adjusted earnings per share grew $0.06 or 42.9% all over Q2 2022.
The company also experienced short-term growth over the previous quarter as each of the three operating segments increased revenue – hospice +10.3%, home health +5.4%, and senior living services +3.8%.
The company attributes the growth to their “continued commitment to the five key focus areas (clinical excellence, enhanced employee experience, acquisitions and organic growth, and margin improvement) and their investment in leadership”, Brent Guerisoli, CEO.
Key Financial Figures
M&A Activity
Pennant expects to remain highly acquisitive in the near future:
“With momentum in our results and a 1.3x net debt to adjusted EBITDA leverage ratio, we are poised to pursue our disciplined acquisition strategy”
– Brent Guerisoli, CEO & Director
In addition, the company has seen an increase in acquisition targets: “Today, we are seeing more potential acquisitions that are consistent with our valuation expectations”, said Guerisoli.
The company completed three acquisitions since the previous earnings call:
Valor Hospice Care – locations in Sierra Vista and Green Valley (adds two new AZ geographies).
Guardian Hospice – expands Pennant’s footprint in Northern Texas and Souther Oklahoma.
Hospice license in Concord, California – will allow one the company’s most successful hospice agencies to expand its service area.
Guidance
Pennant expects to remain highly acquisitive in the near future:
“Given our solid performance in both business segments, we are increasing our full year 2023 guidance to revenue of $526 million to $531 million, adjusted EBITDA of $394 million to $42.6 million, and adjusted EPS of $0.69 to $0.75."
– Brent Guerisoli, CEO & Director
Enhabit Home Health & Hospice (Nasdaq: EHAB)
Highlights
Over a year has passed since Enhabit Home Health & Hospice became a standalone company, but investors remain skeptical of the company’s ability to fulfill financial expectations. This is weighing in the stock price, down 57.4% since its public debut, and has set in motion a strategic review process. This said, if the strategic review process ends up in an investor favorably-viewed outcome, such as a sale to a larger strategic, the stock price could jolt upwards.
Along with the operating challenges from becoming a standalone company, Enhabit has suffered from the uncertainty and threat of CMS’s Home Health rule. Unlike the other public companies covered in this report, the home health segment makes up 81.6% of the company’s total revenue, which makes it more vulnerable to impacts from CMS’s rules.
Operational performance continued to dwindle during Q3 2023 – revenue was down $7.4 million or 2.8% and adjusted EBITDA was down $8.5 million or 26.7% over Q3 2022. The majority of the decrease was caused by a shift in the company’s home health payor mix:
“We estimate the continued shift to more non-episodic payors in home health, decreased revenue and adjusted EBITDA, approximately $8 million year-over-year.”
- Crissy Carlisle, CFO
Enhabit has been actively working to amend their credit agreement, which includes a 5.25x leverage ratio covenant (the company’s current leverage ratio is 5.14 and growing). The company successfully obtained a waiver out of an abundance of caution for the Q3 2023 period and continue to work with their lenders to obtain additional cushion to the financial covenants for the future.
Key Financial Figures
M&A Activity
There will likely be no acquisitions in the short-term as the strategic review process is underway and the outcome has not been determined.
Guidance
Enhabit revised their initial adjusted EBITDA guidance for 2023 of $125 - $140 million down to $93 -$98 million.
The company expects volume growth for 2024:
“In regards to volumes, we expect the success we've had with our payor innovation team and our recruitment and retention of clinical staff to drive volume growth in 2024”
- Crissy Carlisle, CFO