Time to Invest in America's Fastest-Growing Industry?
Baby boomers are going to be a major reason behind growth in a variety of industries, but their impact is likely to be biggest in health care. Roughly 10,000 baby boomers are turning 65 every day, and that's setting the stage for a surge in demand for home health care, an industry that is already worth $78 billion a year. And the U.S. Bureau of Labor Statistics indicates that home health care employment will surge by 59.7% to almost 2 million jobs by 2022, the fastest growth of any industry. Let's see if there are any great investments in this fast-growing market.
The home health care market remains highly fragmented, and threats of margin-squeezing payment cuts from insurers and Medicare are driving a wave of consolidation. Since many of those boomers will rely on Medicare or Medicaid to cover their health care costs, Kindred is attempting to acquire home health company Gentiva in order to boost its exposure to government payers.
Given Kindred's interest in Gentiva, and Gentiva's disinterest in being acquired by Kindred, let's take a closer look at other home health care providers, including Healthsouth and Amedisys .
First, a bit of background
Gentiva gets more than 50% of its sales from home health, and another 36% of its sales come from hospice care. Overall, more than 90% of Gentiva's revenue comes from either Medicare or Medicaid.
Medicare spent $19 billion on home health care in 2012 and $15 billion on hospice, and that spending is only going to grow as Americans age. That has Gentiva thinking its long-term opportunity is better as a stand-alone company than it is as part of Kindred.
Meanwhile, Kindred, which gets most of its business from rehab services and hospitals, gets 52% of its payments from Medicaid or Medicare.
Its bid to acquire Gentiva suggests it believes there's a significant opportunity in creating a comprehensive collection of businesses that can naturally drive referrals to each other. For example, rehab is a natural source of referrals for home health, and home health can often refer to hospice. Additionally, Kindred's willingness to boost its offer for Gentiva suggests that other competitors reliant on Medicare and Medicaid could be in play, too.
Despite offering home health services through 25 hospital-based home health agencies, Healthsouth appears to more closely resemble Kindred than Gentiva. That's because Healthsouth operates more than 100 inpatient rehab hospitals and holds market share of nearly 10% in that business. In 2013, $2.1 billion of Healthsouth's $2.27 billion in sales came from inpatient rehab services.
However, Healthsouth does resemble Gentiva in terms of getting a far larger percentage of its revenue from government programs. In the first quarter, Medicare accounted for roughly 75% of Healthsouth's sales. Although a lot of Healthsouth's sales come from Medicare, very little comes from Medicaid -- about 1%.
And then there is Amedisys, the largest independent home health player behind Gentiva.
Amedisys provides home health and hospice services to roughly 10 million people per year through 396 centers primarily located on the east coast. Those centers produced about $1.25 billion in revenue for Amedisys last year.
Home health represents nearly 80% of Amedisys total sales, and Medicare accounts for about 63% of those home health payments, at a gross margin of 42.4%. The remaining 20% or so of Amedisys sales come from hospice, which carries a gross margin of 46.7%. Overall, Amedisys gross margin grew from 41% last year to 43.5% in the first quarter, resulting in a trailing 12 month gross margin slightly lower than that of Gentiva, but well above Kindred's 33% rate.
Despite a healthy gross margin, however, Amedisys is struggling to turn sales into profit. Just look at earnings per share -- according to S&P Capital IQ, Amedisys hasn't turned an annual profit since 2010.
Fool-worthy final thoughts
The above-75 crowd will be the fastest growing segment of the population from 2020 through to 2030, according to Census data, and it appears that the industry needs that growth given that pricing pressure has significantly lowered operating margin.
Whether Kindred increases its offer for Gentiva again, or another suitor materializes, remains to be seen. Amedisys is more financially troubled than Gentiva and could be far more open to an acquisition, but Gentiva looks like the more attractive of the two.
If Kindred and Gentiva do link up, Healthsouth may find that pressure to do its own home health deal grows. That could put Healthsouth in competition with other large rehab companies for the remaining home health pure plays.
Regardless, investors should invest on the market opportunity, not the acquisition potential. It appears the home health industry has plenty of room to grow, but based on home health companies' past performance, the bigger question may be whether that growth will translate into shareholder-friendly profit. As for me, I'm happy to ponder that question from the sidelines, as this fragmented and inconsistent market is just too uncertain for me right now.
Check out this huge stock opportunity
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster, CLICK HERE NOW.
The article Time to Invest in America's Fastest-Growing Industry? originally appeared on Fool.com.Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.