Addus Broadens Its Reach – Addus HomeCare Corporation (NASDAQ:ADUS)

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Thesis

Addus (NASDAQ:ADUS) continues to execute on its strategy of 3-5% organic growth and growth via strategic acquisitions. The company has a small, but leading position in the massive $60 billion personal care services (PCS) market. It also has an even tinier, but growing share of the $17 billion hospice market thanks to a recent acquisition.

A recent acquisition bolstered the company’s presence in hospice. And federal policy permitting Medicare Advantage plans to offer PCS is broadening the addressable market for a service that had traditionally been confined to Medicaid.

Addus is the only publicly traded PCS company almost exclusively devoted to PCS. No company in the PCS space has more than ~1% market share. Though there are risks with Addus and comparable home health/hospice/PCS companies dependent on Medicaid and Medicare for payment, the company remains a company worth consideration as a growth stock participating in a highly fragmented market servicing an aging population that will continue to grow in size in the coming decades.

Recent Market Expansion

Addus is a leading provider of PCS to patients in a home setting. PCS isn’t medical care. It’s assistance with daily living. Addus home health aides help clients with activities such as bathing, grooming, oral care, assistance with feeding and dressing, medication reminders, meal planning and preparation, housekeeping, transportation service, etc.

In 2018, the company entered the hospice market via acquisition. The company recently broadened its exposure to hospice with the acquisition of an Alabama-based hospice firm that has hospice operations in multiple states where Addus already has a PCS presence. Prior to this recent acquisition, Addus’ hospice exposure was confined to New Mexico. The acquisition also introduces Addus to the Texas market.

Source

In addition to hospice expansion, the company continues to build a PCS position with Medicare Advantage health plans.

Federal policy permitted the introduction of PCS services to Medicare Advantage plans this year. Medicaid is the traditional primary payer for PCS services, which are part of the Long Term Care insurance provided by Medicaid. Those receiving LTC coverage through Medicaid are typically seniors already on Medicare who also qualify for Medicaid.

Addus has PCS contracts with Medicare Advantage plans, but doesn’t expect wider scale adoption of PCS services by Medicare Advantage plans until 2021.

“While we anticipate additional MA plan participants with personal care offerings in 2020, we feel 2021 and later is the true growth horizon for this additional opportunity for Addus. That being said, we are experiencing increased referrals from our current MA partners, and we expect this trend to continue.”CEO Dirk Allison

Overall Market Opportunity

Addus has a lot of tailwinds working in its favor. The population is aging. People are living longer.

Source

The brunt of long-term care and PCS spending falls on Medicaid, whose population Addus has a history of serving. There is limited coverage for such services under Medicare and few affordable options in the private insurance market. In addition to this, there has been a nationwide push to drive down the cost of long-term care by providing more services to patients in the home than in nursing homes, which are costlier than home care. States are likely to continue pursuing home-based care strategies, also called Home and Community Based Supports (HCBS). This plays into the hands of PCS providers like Addus.

Source

As stated previously, Addus is one of 18,000 organizations in the PCS space, some larger competitors include Amedisys (AMED) and LHC Group (LHCG). Addus is smaller than these companies and has less financial resources than either Amedisys or LHC Group. That said, the PCS market is wide open and extremely fragmented. No player possesses more than ~1% market share. Though there are more established players in the hospice market, that market too is open for consolidation in coming years.

Source

Where Addus doesn’t obtain market share via acquisition, it has a strategy for organic growth, which again, the company expects to be 3-5% per year.

Source

Valuation and Risks

Addus is a unique story. It doesn’t have a pure competitor in the public markets. Its competitors are largely tiny mom-and-pop PCS shops. A review of a wide range of valuation metrics suggests the company is overvalued. Since I last wrote about Addus nearly a year ago, my takeaway was that it was probably overvalued when compared to publicly traded hospice and home health companies, some of which dabble in PCS.

But since that time, Addus’ stock has performed nicely – up 16% – and had been up as much as 35% before the company recently diluted share count to make its recent hospice acquisition.

Given the company’s massive addressable market, its consistent 3-5% organic revenue growth coupled with growth via strategic acquisitions, Addus may be presenting a buying opportunity after the recent dilution selloff.

However, with the recent drumbeat for Medicare-For-All, it’s uncertain what the healthcare system could look like in the future. Regardless of the design of the system, the system will still need companies like Addus to provide PCS services. It’s an essential need for an aging population.

In addition to uncertainty about the future of the healthcare system, the company today is highly susceptible to policy shifts at the state level. Medicaid and Medicaid MCOs are the primary source of PCS revenue for Addus, and Medicaid is subject to policy and reimbursement shifts at the state level. This has been a recurring issue for Addus in Illinois, a state with perpetual budgetary problems and one that Addus is heavily dependent on for revenue.

Conclusion

Addus is a niche provider of a service that will always be of need for an aging population. It’s an interesting play on the aging population, but I wouldn’t view it as a core holding given the policy risks and the price dips the stock takes when the company sells stock to finance acquisitions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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