Addus HomeCare: Zacks’ Bull of the Day Play

Addus HomeCare (ADUSSnapshot Report) is a comprehensive provider of a broad range of social and medical services in the home. The company’s services include personal care and assistance with activities of daily living, skilled nursing and rehabilitative therapies, and adult day care.

Its consumers are individuals with special needs who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill and disabled. Its payor clients include federal, state and local governmental agencies, the Veterans Health Administration, commercial insurers and private individuals.

Addus operates its business through two divisions, Home & Community services and Home Health services.

The Home & Community services are social, or non-medical, in nature and include assistance with bathing, grooming, dressing, personal hygiene and medication reminders, and other activities of daily living. The Home Health services are medical in nature and include physical, occupational and speech therapy, as well as skilled nursing.

Addus is like the Acadia Healthcare (ACHCSnapshot Report) of HomeCare. What I mean is that they are one of the largest players in the country and their strategy right now is to acquire other smaller firms to grow both organically and through M&A.

Baby Boomers and HomeCare

As people are living longer and requiring more medical care, the demand for alternatives to nursing homes will only grow. What do aging people in need of extra care really want? They want to stay close to their families and avoid the isolation that can inevitably come with institutionalization.

They want familiar surroundings and freedom. And they also want personal attention for their care needs.

According to the website Care.com…

Most elders would prefer to stay in their own homes, where they know their neighbors and can associate memories with each piece of furniture and object around them, rather than move to an institution as they age.

Things that can make “aging in place” — the current term for staying in one’s own home as one ages — problematic are tasks such as cooking, cleaning, toileting, shopping, doing laundry, and driving, as well as falls, which for frail elders could initiate a downward spiral.

These are the social drivers of a strong business trend for Addus HomeCare.

Money Shift to HomeCare in a $50 Billion Market

Addus gave a presentation at the Oppenheimer 25th Annual Healthcare Conference in December. I’ll highlight some of the key business trends and you can view the full presentation here.

Addus is a comprehensive provider of home and community based services, which are primarily social in nature, focused primarily on the Dual Eligible population (receiving both Medicare and Medicaid) and these service areas: Personal Care, Adult Day Service, and Private Duty.

Addus serves 32,000 customers in 22 states through 132 locations. Home care is a $50 billion market within the overall long-term care market of over $300 billion, including assisted living, nursing, and hospice.

According to a report last year by Research and Markets, the nursing care sector grew at an average annual rate of 1.6% between 2008 and 2013 while home care expanded at an annual average rate of 7.2%. This was the fastest rate of growth among all long-term care sectors. The runner up, assisted living grew at an average annual rate of 5.6%.

And reimbursement is shifting to home health because it is simply less expensive than many skilled nursing options.

Another Growth Industry in Healthcare Megatrend

If you follow my research and trades in Biotech and Healthcare areas like addiction and mental health treatment with Acadia Healthcare, you know that part of the my thesis for the continuing sector boom is an aging population living longer and needing more advanced medicines. Well it’s no different for the elder care aspect.

Addus says “The youngest baby boomers turn 50 this year. Those baby boomers that live to 75 can expect to live at least 10 more years.”

But the problem as they see it is this…

“In just 14 years, life expectancy has increased 2.4 years, meaning more elderly are living longer and, as they do, they become increasingly poor.”

This is where the “payers” come in from all levels of government services, local to federal. But obviously the two big ones that create “dual” recipients are Medicare and Medicaid. According to Addus, this is the breakdown that creates much of their revenue opportunity…

Dually Eligible

20% of Medicare population (total 37 million)

15% of Medicaid population (total 51 million)

Long-term care risks and costs makes it essential that health plan dual eligible members live safely and healthfully at home as long as possible. Since many state programs are moving to Managed Care with the integration of Medicaid and Medicare benefit plans, these trends are being reinforced at all levels of government and community.

Who’s Buying This Little Fish?

Besides the fundamental rationale of owning the fastest growing player in a fast-growing market, here’s another reason I like to follow: institutions are just starting to nibble their way into this small cap.

At just under a $300 million market cap now and only 11 million shares outstanding of which they own over 85%, the big guys are hungry for a bigger float. Here’s a look at who was buying in Q4…

Top Q4 2104 Buyers of ADUS

Fidelity, AQR (who holds 320k shares), and Millennium wouldn’t play around with a small cap like this unless they saw potential. The stock really made no progress in 2014, closing either side of $23 in 12 months. With the breakout move in progress above $24, I think shares are set to test resistance between $29 and $32 this year.

Disclosure: I own ADUS and ACHC for the Zacks FTM Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money Trader.

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