Daily Gains Letter

Three Bullish Healthcare Stocks You Need to Be Aware Of

By for Daily Gains Letter | Feb 7, 2013

DL_John_070213Few investors came out of the Great Recession (which struck in 2008–2009) unscathed, especially retirees. Thanks to plummeting house values and losses in the stock market and 401(k) accounts, many Americans nearing retirement saw a significant chunk of their investing income evaporate.

Today, roughly 40 million Americans are over 65; that number is expected to more than double by 2060 to 92 million. For those retiring at 65, it’s possible they’ll spend more than 30% of their lives in retirement. And they’ll need somewhere to live. (Source: “U.S. Census Bureau Projections Show a Slower Growing, Older, More Diverse Nation a Half Century from Now,” U.S. Census Bureau web site, December 12, 2012, last accessed February 4, 2013.)

While there are a number of companies in the senior housing industry, some are better positioned than others to capitalize on this growing, lucrative market.

Five Star Quality Care Inc. (NYSE/FVE) operates and manages senior living communities in the U.S. One of the country’s largest providers of retirement living, Five Star operates 245 senior living facilities with around 27,000 living units in about 30 states.

A fundamentally solid company, Five Star has a strong national footprint in a growing, lucrative market. Over the last four quarters, the company has announced solid revenue growth, and in the most recent quarter, the company announced it had increased its profitability to $16.4 million. Since the middle of 2012, it has been selling off non-core assets and focusing its attention on the private pay independent and assisted living business.

The company has made substantial progress toward focusing its operations on the private pay independent and assisted living business. Since May 2012, the company has either begun to manage or agreed to manage 14 senior living communities with a combined 3,159 living units; the company generates a large majority of its revenues from residents’ private resources.

In September 2012, Five Star completed the sale of its institutional pharmacy business for $38.7 million. And in October, it reached an agreement to sell two Medicare/Medicaid dependent skilled nursing facilities located in Michigan, with a total of 271 living units, for a sale price of $8.0 million.


Chart courtesy of www.StockCharts.com

Five Star’s share price has been in an uptrend since late 2011, after bottoming near $2.20. Over the last year, the company’s share price has climbed on the heels of strong quarterly results, expanded services, and the selling off of non-core assets. Going forward, streamlining operations and improving occupancy rates could help Five Star make solid long-term gains.

Senior Housing Properties Trust (NYSE/SNH) is a real estate investment trust (REIT) that owns approximately 370 healthcare-related properties in more than 35 states. Its portfolio includes senior apartments, independent and assisted living facilities, nursing homes, medical office buildings, biotechnology laboratories, rehabilitation hospitals, and gymnasiums.

Senior Housing has a market cap of $4.3 billion, a forward price-to-earnings (P/E) ratio of 13.3, and an annual dividend yield of 6.5%.

In the third quarter, the company reported income of $25.6 million, or $0.15 per share. Year-to-date net income came in at $91.2 million, or $0.55 per share. Between January and October, the company acquired or agreed to acquire 38 properties for a total purchase price of approximately $689 million. (Source: “Senior Housing Properties Trust Announces 2012 Third Quarter Results,” NASDAQ OMX web site, October 29, 2012, last accessed February 4, 2013.)


Chart courtesy of www.StockCharts.com

Senior Housing’s share price has increased significantly since June 2012. Should Senior Housing continue to post solid quarterly gains as a result of its continued acquisitions, its earnings should follow in step—so, too, should their dividend yield.

Health Care REIT, Inc. (NYSE/HCN) is a REIT that invests in senior living and healthcare facilities, primarily skilled nursing and assisted living facilities designed for older people needing help with everyday activities. The trust also has investments in independent living facilities, hospitals, medical office buildings, and specialty care facilities. Its portfolio includes 1,030 properties in 46 states, the United Kingdom, and Canada.

The company has a market cap of $16.4 billion and a forward P/E of 16.2. It also provides an annual dividend yield of six percent, and recently, the company announced its 167th consecutive quarterly payment.

The company reported third-quarter net income of $37.3 million, or $0.16 per share, and year-to-date net income of $131 million, or $0.61 per share. (Source: “Health Care REIT, Inc. Reports Third Quarter Results,” Health Care REIT, Inc. web site, November 6, 2012, last accessed February 4, 2013.)

Commenting on the results, company CEO George L. Chapman said, “Our business model continued to hit on all cylinders during the third quarter. We believe the attributes of our business model position us to continue to deliver consistent and resilient cash flow growth, predictable deal flow, and attractive risk adjusted returns to our shareholders.” (Source: Ibid.)

In a deal aimed at becoming one of the biggest owners of nursing homes in the U.S., Canada, and Britain, Health Care REIT announced in August that it has acquired 125 properties of Sunrise Senior Living, Inc. The $3.2-billion deal remains on track to close in early 2013. (Source: Health Care REIT press release, “Health Care REIT to Acquire Sunrise Senior Living,” Health Care REIT, Inc. web site, August 22, 2012, last accessed February 4, 2013.)


Chart courtesy of www.StockCharts.com

A fundamentally strong company, Health Care REIT could continue its impressive run on the heels of strong quarterly results and ongoing acquisitions.

In the near term, President Obama’s Affordable Care Act requires every American to acquire health insurance by 2014 or be subject to a tax. Those unable to pay for health insurance will be offered subsidies or Medicaid. (Source: “Compilation of Patient Protection and Affordable Care Act,” United States House of Representatives web site, May 1, 2010, last accessed February 4, 2013.)

Recent statistics from the Census Bureau show that roughly 50 million Americans did not have health insurance in 2009. (Source: “Health Insurance Highlights: 2010,” U.S. Census Bureau web site, last accessed February 4, 2013.)

For investors, this creates new revenue streams and a large number of interesting investing opportunities.

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