Inside Wall Street: Looking Beyond Addus Homecare's Messed-Up Earnings Report

Gene Marcial Inside Wall Street -- Adus Homecare
Gene Marcial Inside Wall Street -- Adus Homecare

There's something to be said about companies that report clear and easy-to-understand sales and earnings results. A convoluted or vague summation can clobber a stock. That's what befell Addus Homecare (ADUS), a provider of a broad range of health care and medical services in the home. After reporting on Mar.18 what turned out to be "confusing" fourth-quarter results, its stock got pounded, dropping to $6.30 a share from nearly $9 the day before.

The stock has yet to recover as investors have shied away while they try to untangle the company's "mixed" appraisal of what the sales and earnings actually look like.

"It was a confusing quarter with many moving parts, and several one-time charges related to the company's recent IPO" in October 2009, says Andreas Dirnagl, analyst at investment bank Stephens. But after digging into the numbers and "getting good color on management's conference call, we feel much more comfortable with the company's operating performance," he says.

"Underlying Growth Trends Are Good"

The main cause for disappointment, notes the analyst, was the addition of a $1.5 million reserve on accounts receivable. That, in part, caused Dirnagl to lower his 2010 earnings estimate, to 84 cents a share from 94 cents. Nonetheless, he still expects the stock to double in 12 months. (Stephens has done banking for Addus.)

Moreover, Dirnagl retained his rating of overweight on the stock. "Overall, this quarter shows the fundamentals of Addus's core home care business are intact, and the underlying growth trends are good," he says. The $1.5 million reserve on bad debts "doesn't alter the fundamentals of the collectivity of receivables," explains Dirnagl.

The additional reserve was deemed necessary "to increase the effectiveness of our collections," said Addus President and CEO Mark Heaney in explaining the move.

To Dirnagl, the drop in the stock price represents an opportunity for investors who believe, as he does, that Addus is an attractive pure play in home care services. He says demand for such services is on the rise among the elderly and frail patients who would rather receive care at home than stay at a hospital or nursing home. Addus provides in-home services to more than 23,000 patients from its 120 locations in 16 states. Its services include personal care and assistance with daily living activities, skilled nursing and rehabilitative therapies.

Buying on Weakness

As the largest provider of home care services in the U.S., Addus brings economies of scale and professional management, and it offers a one-stop shop for in-home care needs. The major payors for such services, apart from private individuals, include the federal government and state and local and government agencies -- plus the Veterans Health Administration and commercial insurers.

Analyst Michael Wiederhorn of Oppenheimer also believes Addus is well on track despite the confusing fourth-quarter results. Its core business remains intact, he says, and "we believe the stock offers attractive long-term value." He adds: "We would be buyers on any weakness caused by the fourth-quarter earnings mess."

Wiederhorn rates the stock as outperform with a 12-month price target of $11. He expects Addus will earn 84 cents a share in 2010, rising to $1.05 in 2011. (Oppenheimer has done investment banking for Addus.)

Attractive Angles

Only three Wall Street analysts follow Addus, and all of them remain bullish. There aren't many pure plays among in-home health care companies. That, plus the fact that home care is perceived as a long-term growth business – combined with the stock's depressed price – adds to Addus's allure, says Stephens' Dirnagl.

Indeed, the stock should prove attractive to investors focusing on microcap stocks involved in growth businesses. It's crimped price-earnings ratio of about 7.1 is also a draw. Before the release of the fourth-quarter results, the stock traded at nearly 11 times projected 2010 earnings. If you see upside in Addus despite it fourth-quarter reporting snafu, now's the time to act.

Editor's Note: This story has been updated to correct the spelling of Addus Homecare and two instances of Andreas Dirnagl's name.