Almost Family to Uncle Sam

THIS YEAR WAS meant to be a lean one for America's home nursing agencies. In September 2007 the Centers for Medicare & Medicaid Services made sweeping changes to how it reimburses for home health care. For-profit operators would see rates fall by several percentage points, it projected.

But of the four largest publicly traded ones, just one is expected to post a (modest) profit decline this year. Three are seen boosting profits by an average of 29%. All four beat Wall Street's profit forecasts by double-digit percentages in their most recent quarter. Shares of all four have sharply outperformed the market this year, gaining an average of 48%, compared with a 13% decline for the S&P 500 index.

The new rules expand the number of billable diagnoses to 153 from 80. More importantly, they end the practice of increasing reimbursements by a lump sum once 10 visits are made for a particular treatment. Reimbursement increases are now phased in between 6 and 20 visits. Under the old system, providers could increase profits by focusing on therapies that are likely to need at least 10 visits, and not many more. Those therapies are now less profitable, but others requiring fewer or more visits have become more profitable.

The largest home nursing agencies are benefitting doubly. Their advanced information technology systems allow them to quickly adjust practices in such a way as to profit from the new pricing scheme. Also, many smaller operators, faced with the prospect of declining profits, are opting to sell. Avondale Partners, a Nashville investment bank, reports a "dramatic increase" in merger and acquisition activity among home health-care providers this year. That has allowed big players to buy their way into increased profits and reduced competition.

The industry seems ripe for further consolidation. The U.S. has more than 8,000 home health agencies, three-quarters of which are small businesses. Spending on home health care tops $47 billion a year, and the growth outlook is favorable. Consumers prefer home care to the institutional variety, technological improvements are allowing more therapies to be provided at home and home care generally costs Medicare and Medicaid less than hospital and nursing-home stays.

Of the four aforementioned companies, Louisville, Ky.-based Almost Family (AFAM) is perhaps poised to gain the most, since it's the smallest. In its most recent quarter the company increased net service revenue by 50% to $48.7 million. Profit jumped 95% to $3.9 million. Per-share profit increased 43%, reflecting the completion of a stock offering that raised $41.8 million. During the quarter the company completed its $45.2 million acquisition of Patient Care, a home health operator with yearly sales of $47 million. It also established a $75 million line of credit, which seems likely to fund more acquisitions.

Wall Street reckons Almost Family's earnings per share will surge 35% this year and 19% next year, but those forecasts seem subject to change. They've been ratcheted up numerous times in recent months. Just 90 days ago the outlook called for 1% earnings growth this year and 6% next year.

The rapidly improving outlook for the company isn't lost on investors. Shares have more than doubled in price this year. Their price of just under 19 times next year's earnings forecast seems ambitious but not unreasonable.

Almost Family turned up recently on a screen for stocks that are at or near their 52-week-high prices. Investors are often reluctant to buy these highfliers, but studies have long shown that such stocks are more likely than not to beat the market in the coming years. Have a look at all seven screen survivors if you like or run the search yourself anytime using SmartMoney's stock screener and the full list of search criteria.

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