1. National Healthcare Corp.
Real Client Managed Portfolio By
Neha Saoji
Martin Maurer
Yifan Liu
Prateek Baveja
Presented April 30, 2015

2. Agenda
Introduction Company Review Macroeconomic Conditions Industry Prospects Stock Market Performance Financial Analysis Financial Projections Valuation Recommendation

3. Introduction – Current Position
May 14, 2014
Purchased
Cost Basis: $5,525
April 27, 2015
Current price: 64.36
Market Value: $6,436
HPR = 16.5%
P&L = $911
December 2, 2014
Hold 100 shares @$59.82
Stock Performance till date
Position and Transaction History

4. Recent Stock Performance
20 day MA consistently above 200 day MA
30 day RSI  neither overbought or oversold
Source: S&P Capital IQ

5. Recent Stock Performance
Underperformed Small-Cap Health Care Services Index
Source: S&P Capital IQ

6. Main Business Activities
Business Overview
Main Business Activities
Skilled Nursing Care
Rehabilitation Care
Senior Living Services
Home Health Care Services
Provider of Long Term Care Services
Other Business Activities
Management, Insurance & Financial Services
Hospice Services
Long term care as it exists today is broad in its definition and generally refers to a range of services that support the daily needs of individuals with limited functioning or disability (Houser 2007). Limited functioning or disability is typically determined according to an individual’s ability to complete activities of daily living (ADLs) or instrumental activities of daily living (IADLs). Such activities include eating, bathing and dressing, as well as management of food, medication or house hold chores (Binstock, Cluff et al. 1996).
The long term care population generally refers to the nearly 70% of the Americans age 65 or older who will require some type of long term care within their lifetime
All these services require continuous health care but not hospital services. Care must be ordered by and under the direction of a physician
Subacute care is comprehensive inpatient care designed for someone who has an acute illness, injury, or exacerbation of a disease process. It is goal oriented treatment rendered immediately after, or instead of, acute hospitalization to treat one or more specific active complex medical conditions or to administer one or more technically complex treatments, in the context of a person’s underlying long-term conditions and overall situation.
Post acute care: Following a hospitalization for injury or illness, many patients require continued medical care, either at home or in a specialized facility. Post-acute care refers to a range of medical care services that support the individual’s continued recovery from illness or management of a chronic illness or disability.
In our facilities, experienced medical professionals provide medical services prescribed by physicians. Registered nurses, licensed practical nurses and certified nursing assistants provide comprehensive, individualized nursing care 24 hours a day. In addition, our facilities provide licensed therapy services, quality nutrition services, social services, activities, and housekeeping and laundry services.
We operate 74 skilled nursing facilities as of December 31, We manage eight facilities for third party owners. Revenues from the 66 facilities
we own or lease are reported as net patient revenues in our financial statements. Management fee income is recorded as other revenues from the eight facilities that we manage.
Source: k.

7. Business Overview Customers Sources of Revenues
No individual customer or group of customers account for a significant portion of revenues
Care must be ordered by a physician
Patients receive funds to pay cost of care from the following sources
Medicare
Medicaid
Private Pay
Managed Care
Medicare reimbursement rates were trimmed 11.1% in 2012.
On April 1, 2013, the automatic 2% cuts (known as “sequestration”) begen for Medicare providers. The resulting decrease in revenue to NHC’s skilled nursing facilities was approximately $4,500,000 for the 2014 caldendar years, or 1,125 per quarter ( K, p. 10)
Source: K, p. 7

8. Business Overview – Facilities and Programs
Skilled nursing & senior living facilities, and homecare programs 16 2 53 3 1 25 8 4
Alabama (3)
Florida (8)
Georgia (3)
Kentucky (2)
Massachusetts (4)
Missouri (16)
New Hampshire (3)
South Carolina (25)
Tennessee (53)
Virginia (1)
Source: NHC website:

9. Management
Management underperformed peers
Source: Bloomberg

10. Strategic Objectives Growth in assisted living market
Expand long-term care operations
24 new constructions or facility purchases since Sept. 2013
Source: K, p. 12 and p. 33

11. S W T O SWOT Analysis Many private payers (25%)
Integrated business segments
Decline in occupancy rates
Dependence on third-party payers and reimbursement rates S W T O
Aging population
Increasing insurance coverage (Affordable Care Act)
Wrongful death lawsuits
Industry regulation

12. Macro Review – Industry Drivers
Federal Funding for Medicaid & Medicare
Aging Population
5.8% CAGR
Medicare reimbursement rates were trimmed 11.1% in 2012.
On April 1, 2013, the automatic 2% cuts (known as “sequestration”) begen for Medicare providers. The resulting decrease in revenue to NHC’s skilled nursing facilities was approximately $4,500,000 for the 2014 caldendar years, or 1,125 per quarter ( K, p. 10)
Source 1: “Number of adults aged 65 and older.“ IBISWorld Business Environment Profiles. IBISWorld. May
Source 2: Federal funding for Medicare and Medicaid.“ IBISWorld Business Environment Profiles. IBISWorld. July 2014.

13. Macro Review – Industry Drivers
Increased Private Insurance Ownership
“Number of people with private health insurance.“ IBISWorld Business Environment Profiles. IBISWorld. Oct

14. Industry Analysis 58,500 long-term-care providers in U.S. in 2012
No dominant brand in the industry
Intense competition in the South and West regions
Depends on referrals from acute care hospitals, physicians & others
Crop the chart and put the po
58,500 long-term-care providers in U.S. in 2012
NHC competes with hundreds of skilled nursing facilities in the states they operate in
No single operator dominates the markets
NHC depends on referrals from acute care hospitals, physicians, residential care facilities, church groups and other community organizations
ints from the next slide
58,500 long-term-care providers in U.S. in 2012
Source: CDC/NCHS, National Study of Long-Term Care Providers and Table 1 in Appendix B.

15. Industry Analysis - Occupancy Rates
Source:

16. Industry Outlook
Despite favorable demographic trends, decreased government funding has hindered growth
Annual Revenue Growth 2010 –  2.9%
Expected Annual Revenue Growth 2015 4.8%
Expected Annual Revenue Growth – 2020 5.9%
Favorable demographic trends will outweigh potential impediments to growth
IBIS World Industry Report 62311: Nursing Care Facilities in the US; Jan. 2015

17. Porter’s Five Forces Industry Rivalry: Medium
Bargaining power of suppliers: Medium
Bargaining power of buyers: Low-Medium
Threat of substitute: Low
Threat of new entrants: Low
Meet requirements of insurance/Medicare for payments
Long-term relationship with drug providers
Large capital requirement and long time horizon
Accumulated word-of-mouth and reputation
Left aligned
Patients can choose from a number of healthcare facilities, but the number is very limited
Barely no substitute can be found within the field
New form of healthcare need time to be developed

18. Financial Ratios

19. Financial Ratios

20. Assumptions

21. WACC Calculation

22. DCF Valuation

23. Sensitivity Analysis

24. Valuation – Comparable Selection
Company
Business Focus
Primary Payer Source
Capital Structure (Liab./Assets)
Profitability (EBIT-Margin)
Size
(No. of employees)
Ensign Grp.
Skilled Nursing
Medicare (35%)
57.6%
(1.7%)
25,000
Diversicare
Skilled nursing
Medicaid (67%)
90.9%
1.4%
5,150
LHC Group
Home care services
Medicare (75%)
32.3% 7%
8,628
Addus HomeCare Corp.
Illinois Dept. of Aging (53%)
29.2%
6.1%
10.790
NHC
Medicare (39%)
23.9%
8.1%
13,050
Company 10-K’s and S&P Capital IQ

25. Average Intrinsic Value
Comparable Valuation
Even though NHC is relatively cheap compared to the other firms (as evidence by the low multiples and the Greenblatt earnings yield, company management is not very efficient employing its resources
Average Intrinsic Value
$62.6

26. Comparable Valuation - $62.60
Recommendation
DCF Valuation - $59.98
Comparable Valuation - $62.60
Market Value - $63.69
Stock just slightly overvalued based on our analysis
Valuation
New facilities have the potential to boost earnings as evident in the last year
Growth
Demographics are in our favor as discussed
Other factors