Buy Into Long-Term Care

By Ben McClure | January 05, 2009 AAA

As we think about stocks heading into 2009, one thing is for certain, there are going to even more people over the age of 65 next year than today. Thanks to the bulging baby boom generation, the older population in 2030 is projected to be twice as big as in 2000, growing from 35 million to 71.5 million and representing nearly 20% of the total U.S. population.

Few sectors are more favorably exposed to this huge demographic trend than long-term-care providers. With a rapidly aging population putting pressure on the healthcare system, long-term-care providers are bound to see a big uptick in demand for their nursing care, assisted–living and acute care services. What's more, the incoming Obama administration's plans to widen healthcare insurance could drive expansion further. (For more, see Long-Term Care: More Than Just A Nursing Home.)

Of course, it could be a bumpy ride for care providers in the short-to-medium term. As the collapse of the housing market and recession unfolds, we could see a pullback in consumers' willingness to pay for non-essential services. As a result, investors ought to keep an eye on healthcare providers' earnings and debt levels. Here are some stocks to watch.

Kindred Healthcare (NYSE:KND)
Kindred offers size. The company provides healthcare services in 658 locations across 40 states. It also offers investors stability. Eighty percent of Kindred's admissions are Medicare and Medicaid patients which helps ensure steady revenue even in the face of a shaky economic climate. Its debt levels are low, lowering the risk of Kindred being unable to refinance in the midst of tighter credit markets. Heading into 2009, Kindred's good financial visibility ought to be rewarded in the marketplace.

Sun Healthcare Group (Nasdaq:SUNH)
Sun Healthcare is a small-cap long-term healthcare provider which went through a successful series of acquisitions and restructuring that is translating into strong earnings performance. Total net revenue for the quarter ended September 30, 2008, was $456.7 million, up 5.6%, compared to $432.6 million for the same period one year ago. Normalized, diluted EPS jumped to 19 cents from 15 cents. That said, Sun has a sizable debt load to pay down that will put pressure on cash flow generation in 2009. (For more reading, see Demographic Trends And The Implications For Investment.)

Skilled Healthcare Group
(Nasdaq:SKH)
Shares in Skilled Healthcare - whose nursing home facilities offer specialized service such as chemotherapy, dialysis and rehabilitation - took a beating in the last few months of the year. Yet, the company has delivered solid earnings this year. In the third quarter, it earned $9.6 million, or 26 cents per share, up a whopping 40% from $6.9 million, or 19 cents per share a year ago. Revenue increased 13%, to $182.5 million from $161.5 million, The selloff in Skilled Healthcare could be viewed as overdone.

Brookdale Senior Living (NYSE:BKD)
It's hard to be overly enthusiastic about Brookdale Senior Living. While the retirement and assisted living provider will probably manage to fix short-term problems associated with mortgages payments, it has a mountain of debt to pay down over the next few years. On the back of a series of quarterly losses and tightening credit conditions, liquidity is a worry. Also, Brookdale recently suspended its dividend, which is acting as a clear sign of the economic issues facing the company. Since September the stock has cratered, probably for good reason.

Bottom Line
The decline in share prices over the past year has left many investors with plenty of aches and pains. Long-term-care providers may be the place where investors can get the relief they need.

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