While it wasn’t a particularly big move in Barchart.com’s Top 100 Stocks to Buy, the Pennant Group (PNTG) is a stock on a roll. The question is whether the Idaho-based provider of home health, hospice, and senior living services in 13 states can keep it going.
In Tuesday pre-market trading, PNTG stock moved up one position in the Top 100 Stocks to Buy, to 36th position. More importantly, its weighted alpha of 163.16, is almost 30 percentage points above its 52-week return of 139.59%.
I don’t know much about the company but I sure do want to know what all the fuss is about.
Here’s what’s driving PNTG stock higher in 2024.
Is Pennant Group a Consolidation Play?
Pennant Group is definitely a healthcare industry consolidator.
It is a holding company that provides healthcare services through 115 home health and hospice agencies and 54 senior living communities in 13 states. Each of these businesses operates as separate, independent operating subsidiaries with their own management, employees and assets,” Pennant Group’s website states.
Pennant was created in January 2019 to hold the home health and hospice agencies and most of the senior living businesses of Ensign Group (ENSG), a California-based provider of skilled nursing, physical, occupational and speech therapies at 310 healthcare facilities in 14 states.
Pennant was spun off as a public company in October 2019. It operates two business segments: Home Health and Hospice Services and Senior Living Services. Approximately 62.6% of its revenue is from Medicare and Medicaid reimbursements, with Managed Care accounting for 13.5% and self-pay representing 23.9%.
In 2019, it had 63 home health and hospice agencies and 52 senior living facilities. By the end of 2023, the former was 111, 76% more than when it went public. The number of senior living communities dropped by one over the past five years. All the additions were through acquisitions in combination with organic revenue growth.
One of the Biggest Acquisitions Yet
On July 11, Pennant announced that it was acquiring certain assets of Signature Healthcare at Home for $80 million. It is, if not the largest, one of the holding company’s largest acquisitions in its history.
“A key tenet of Pennant’s disciplined growth strategy is that we make acquisitions from a foundation of strength, where we have solid existing leaders and well-performing operations. This deal is a great example of that, and it will provide opportunities for current and future operators within the Signature footprint to become C-level leaders in Pennant,” stated Pennant CEO Brent Guerisoli in its press release.
Signature has over 650 home health and hospice staff and annual revenue of approximately $78 million, so it’s paying slightly more than 1x sales. It has over 12,000 home health admissions and an average of 300 people in hospice care daily.
The acquisition strengthens Pennant’s position within the Pacific Northwest marketplace for home health and hospice care.
In 2023, it added three home health agencies, eight hospice agencies, two home care agencies, and two senior living communities. It paid 31.4 million for these acquisitions.
Despite all the acquisitions, Pennant’s debt levels have remained relatively constant. As of Dec. 31, 2019, it had a net debt of $334. 5 million. As of March 31, 2024, it was $342.1 million. Over the same period, its revenues grew from $338.5 million in 2019, to $575.3 million in the trailing 12 months ended March 31.
It’s increased its revenues by 70% over the past five years without adding to its debt load. At the same time, its operating income has increased by nearly 50%, providing the cash flow to make further acquisitions.
Pennant’s acquisition strategy involves finding businesses that strengthen their existing markets without breaking the bank. Moreover, these acquisitions bring talent that can develop into future leaders in the holding company’s management team.
The acquisition funnel approach is working for Pennant Group. Since going public in 2019, its shares have appreciated by 74%. However, during the pandemic, they were trading near $65.
The Bottom Line
At the beginning of 2021, Pennant stock was valued at nearly 4.86x sales. Today, it’s 1.46x revenue, about one-third the multiple. The question to answer is whether PNTG stock can get back to $65 in the next 12-24 months.
Analysts seem relatively positive about its stock. Of the four covering it, three rate it a Buy. However, the 12-month target price is only $28, about where it’s currently trading, which suggests they believe it’s come too far, too fast in 2024.
I don’t think there’s any question that Pennant's services will continue to be in demand from Americans. The company’s acquisitions will continue to boost its revenues and earnings.
However, in my experience, the home healthcare industry tends to have periods of strength, followed by periods of weakness, which tend to reduce shareholder returns over longer periods.
If I were to take a position in Pennant, it would be a small one.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
