National HealthCare Corp. (NHC, Financial) is the oldest U.S. publicly-traded senior health care company. National HealthCare affiliates operate (for themselves and third parties) 75 skilled nursing facilities with 9,473 beds, 24 assisted living communities, five independent living communities, one behavioral health hospital, 35 homecare agencies and 28 hospice agencies. National HealthCare’s other services include Alzheimer’s and memory care units, pharmacy services, a rehabilitation services company and providing management and accounting services to third party post-acute operators. The company recently closed on the acquisition of Caris HealthCare, L.P., a hospice provider.
National HealthCare's facilities are a combination of owned and leased, so it is both a landlord and operator. The company reported that census in its skilled nursing facilities for the second quarter of 2021 increased approximately 4% from the beginning of April 2021 through the end of June 2021. The census in its skilled nursing facilities increased approximately 7.5% from the beginning of January 2021 through the end of June 2021. The company is benefitting from the ageing population in the U.S., and it should continue to do so, providing moderate growth with a high level of certainty.
National HealthCare's balance sheet, as shown below, is in excellent shape with no long-term debt:
The income statement shows steady progress over the last five years. Note the large increase in net income recently is due to non-recurring accounting adjustments resulting from the acquisition of Caris Healthcare.
The operating cash flow diagram shows that core FCF (i.e., Fee Cash Flow without changes to working capital) is steady at about $70 million per annum. With a market cap of 1.08 billion, this works out to be about a 7% core FCF yield. Out of that, National HealthCare pays out about a 3% dividend to shareholders.
Valuation
The following GuruFocus chart shows that book value per share and tangible book value per share have increased steadily over the last 15 years at around a 7.5% compound annual growth rate (CAGR). The stock price has recently faltered, but I expect it to catch up to fundamentals in the near future. I think 7.5% per year is a good estimate of NHC's medium-term growth trajectory for valuation purposes.
Using the core FCF of $70 million we worked out above (and using 15.4 million outstanding shares), we get core FCF of $4.53 per share per annum. Plugging this into the GuruFocus two-stage discounted cash flow (DCF) calculator below gives us fair value of approximately $127. Note that I chose to add the tangible book value, as a large portion of National HealthCare's assets are buildings (hard assets) which can be sold.
GuruFocus' projected FCF value (below) gives a value of $92, which also indicates an over 20% margin of safety. The projected FCF value is designed for valuing companies with erratic earnings; it takes an average of six years FCF plus 80% of book value and applies a growth multiple.
Conclusion
Overall, I think National HealthCare is a growing, well-run debt-free company which pays a decent dividend and is undervalued by at least 20%. It is solid conservative stock in today's high-priced stock market. Medium term demographic changes to the population are also favorable for the company.
