The American long-term care industry has been growing rapidly and will continue doing so for years to come. According to a study from the US Department of Health and Human Services, more than 70 percent of Americans over the age of 65 will need long-term care services at some point in their lives. Anyone over the age of 65 has a 40 percent chance of entering a nursing home and about 20 percent of them will remain there for at least five years.
The size of the 65 and older population jumped by more than 15 percent between 2000 and 2010, compared to just 9.7 percent growth in the population as a whole. That group now makes up about 13 percent of the total population and is forecast to account for more than 16 percent by the end of this decade and 20.2 percent by 2050.
Those trends have spurred huge runs for real estate investment trusts (REIT) that operate assisted-living facilities, rehabilitation centers and nursing homes across the country. While the senior living REITs have been an extremely profitable play on America's graying population, their tide is ebbing with the prospect of rising interest rates creating fears that their profitability will be dinged. That creates opportunities for value investors focused on long-term returns, but it means short-term volatility.
In this context, one compelling investment now is Omnicare (NYSE: OCR), a company that provides pharmacy services to long-term care and other medical facilities. Omnicare receives prescription orders from physicians at facilities, reviews them for effectiveness and any potential interactions with other drugs the patient is receiving and then prepares the drugs in specialized individual packages for easy administration.
Omnicare has consultant pharmacists who can regularly review patient charts for potential interactions and duplications or to recommend alternative drugs or formulations that can increase the effectiveness of a! patient's medications, while also potentially reducing costs. It also has specially-trained nurses available who can administer infusion medications if needed by facilities.
The company also has a specialty care group that provides medication dispensary and management services for patients of all ages suffering from rare or unusual conditions that require specialized medications not commonly found on pharmacy shelves.
Omnicare has only recently started to gain favor with investors with its shares gaining ground over the past 12 months or so. In years past, the company was known for a growth strategy driven by acquisitions, piling up debt and creating uncertainty for investors.
However, under chief executive officer John Workman, who recently announced that he plans to retire, the company did an about face and began focusing on organic growth, streamlining operations and returning more capital to shareholders.
With Workman at the helm, the company experienced three consecutive quarters of net bed growth (a measure of patients served), a 30 percent increase in revenue from the specialty care group and an almost doubling of the company's dividend. More than $500 million worth of company shares have also been repurchased over his time as CEO. Needless to say, the market has been thrilled with his performance and over the course of his tenure the company's shares have gained just more than 58 percent in value.
But since the company announced its full-year results on February 19, its share price has declined by 8.3 percent. The company posted an earnings per share (EPS) loss of $0.43 for 2013 versus a gain of $1.78 in 2012. That loss came despite the fact that net sales grew from $5.88 billion in 2012 to $6.01 billion in 2013, with gross profit up from $1.4 billion to $1.42 billion.
One of the main culprits for the loss were discontinued operations, as the company ended its hospice pharmacy services and some of its retail operations under the specialty care grou! p over th! e course of the year, nicking $128 million from cash flow. The company also purchased $101 million in inventory in the final quarter of the year, taking its full year purchases to a total of $138 million due to restocking to accommodate expected future growth and to take advantage of favorable pricing.
Omnicare also paid down $214 million in debt last year while restructuring its remaining maturities, spreading them more evenly over the next 20 years to take advantage of favorable rates and reduce refinancing risk. No new debt was issued over the course of 2013. It also repurchased $221 million worth of shares while paying a total of $63 million in dividends.
Workman opted to take the bulk of the pain related to changing the company's growth strategy this year rather than dragging it out. As a result, his successor Nitin Sahney will essentially be getting a clean slate. Previously serving as the company’s president and chief operating officer, Sahney is expected to continue Workman's same program of focusing on organic growth.
For 2014, net sales are expected to grow by more than 5 percent to between $6.3 billion and $6.4 billion, while adjusted cash EPS from continuing operations are expected to jump from $3.43 to between $3.64 and $3.72.
With favorable demographics, a more sustainable growth strategy and a positive pricing outlook thanks to drug patent expirations, the company should turn in solid growth in 2014.
This is an excellent opportunity to pick up shares of Omnicare under 63.
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