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2 Nursing Home Stocks to Brave the Oversupplied Market Woes

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The increasing number of aging adults have been driving demand for nursing home facilities, thus benefiting the Zacks Medical-Nursing Home industry. Provision of ancillary services, such as outpatient therapy, health and wellness, fitness and concierge services are likely to aid players in the space.

However, the nursing home companies have been grappling with surplus supply of facilities weighing on its occupancy levels; stiff competition with players entering this fragmented market; increased cost of labor and escalating operating expenses due to investment in technology. Under the circumstances, The Ensign Group, Inc. (ENSG - Free Report) and Brookdale Senior Living Inc. (BKD - Free Report) are warranting a closer look.

About the Industry

Companies in the Zacks Medical-Nursing Home industry provide long-term skilled nursing care and social services. The industry includes skilled nursing facilities for recovery from acute or chronic medical conditions, mental health and substance abuse facilities, and various types of independent living, community care and assisted-living arrangements. Nursing homes typically care for patients recuperating from major medical procedures and senior patients with chronic disabilities, and deteriorating mental and physical capacities. A wide array of healthcare and dependent-care services is provided including 24-hour nursing care, physical therapy, help with activities of daily living, such as bathing, eating and dressing, housekeeping, food service, personal services and leisure activities. Also, some provide mobile diagnostics services benefiting patients with lower mobility.

3 Trends Defining Nursing Home Industry's Future

Oversupplied Market: Even though construction of new senior living communities slowed down in 2020, the industry experienced several years of significant construction of new communities and other buildings. This resulted in excessive supply, which put downward pressure on occupancy and the rates that operators can charge for their services to their residents. Demand has also taken a hit as older adults are raising the age limit at which they move to senior living communities or forgoing such a move entirely. Additionally, burden on governmental budgets induced reductions or limitations in government funding growth for senior living and healthcare services, despite the increasing regulatory requirements imposed on the industry, are hurting the companies. These revenue pressures are further accompanied by increased costs for labor, insurance and regulatory compliance.

Rising Costs: The coronavirus induced supply chain disruption is raising the cost of equipment used in nursing home facilities, consequently hurting profits. Higher costs of utilities, equipment and supplies, foods, insurance and real-estate taxes are also denting financial results. With the high level of new openings, nursing and caregiver shortages due to the COVID-19 pandemic, lower levels of unemployment and implementation of higher minimum wages gave way to wage pressures and stiffened competition for community leadership and personnel. Companies are facing adverse effects on their results due to increasing salaries, wages and benefit costs.

Aging Population Growth: The primary market of the senior living industry consists of individuals aged 80 and above. Owing to demographic trends, and continuous advancements in science, nutrition and healthcare, the senior population is expected to witness constant growth. The U.S. Census projections suggest that starting 2022, there will be nearly one million new potential residents per year. As a result, demand for senior care will increase in the future. As seniors are living longer, rapid growth in this segment of the population is expected. This will increase the number of people suffering from Alzheimer's disease, other dementias and the onus of other chronic diseases and conditions. As a result of increased mobility in society, shrinking of average family size and the growing number of two-wage earner couples, families struggle to provide care for seniors and therefore look for alternatives outside their familial bounds for care. There is a growing awareness among seniors and their families concerning the types of services provided by senior living operators, which can further buoy demand for assisted living services.

Zacks Industry Rank Indicates Bearish Outlook

The group’s  Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates dull near-term prospects. The Zacks Medical-Nursing Home industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #215, which places it at the bottom 15% of more than 250 Zacks industries.

Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. Given the lackluster near-term prospects, companies in the space are expected to take a hit.

Before we present a couple of stocks that you may want to retain in your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500, Outperforms Sector

The Zacks Medical-Nursing Home industry remained below the Zacks S&P 500 composite but fared better than its own sector over the past year.

The stocks in this industry have collectively jumped 13% in the past year while the Medical sector has declined 11%. Meanwhile, the Zacks S&P 500 composite has gained 26.1%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month Enterprise Value to EBITDA (EV/EBITDA) ratio, which is commonly used for valuing nursing home stocks, the industry is currently trading at 110.40X compared with the S&P 500’s 15.46X and the sector’s 9.58X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

2 Stocks Worth A Closer Look

We are presenting two stocks with a Zacks Rank #3 (Hold) each from the Medical-Nursing Home industry. Considering the current industry scenario, it might be prudent for investors to hold these stocks in their portfolio that are well placed to generate long-term growth.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Ensign Group, Inc.: Based in San Juan Capistrano, CA, Ensign provides healthcare services in the post-acute care continuum, urgent care center and mobile ancillary businesses in the United States. ENSG’s growth has been driven by its expertise in acquiring real estate or leasing post-acute care operations and transforming them into market leaders. The stock grew 7.5% in the past year and is expected to rise further in the coming days. Its series of buyouts and alliances poise it well for bottom-line growth.

Ensign raised its current-year earnings projection to $3.60-$3.68 from the prior projection of $3.55-$3.67 per share. It anticipates annual revenues in the band of $2.62-$2.69 billion, the mid-point indicating a rise of 16% from the 2020 reported figure. It’s earnings per share has witnessed three upward estimate revisions in the past 30 days against none in the opposite direction. It beat earnings estimates in each of the past four quarters, the average surprise being 1.8%.

Price and Consensus: ENSG

Brookdale Senior Living Inc.: Headquartered in Brentwood, TN, Brookdale is riding on the economic growth in the domestic market. It operates more than 680 senior living communities across the country. BKD’s vast network enables it to increase wellness and provide premier healthcare for the residents. It has witnessed occupancy growth for the past few quarters indicating a recovery in demand. This has boosted the stock by 48.6% in the past year and is expected to push even higher in the coming days.

Brookdale estimates its adjusted EBITDA for the fourth-quarter 2021 to be within $35-$40 million. The Zacks Consensus Estimate for 2021 revenues is pegged at $2.8 billion. With rising liquidity and decreasing debt level, the company’s balance sheet is expected to become stronger. Its decreasing adjusted free cash outflow highlights growing strength in operations. In the past 30 days, its 2021 bottom line estimate witnessed more than 24% increase. BKD beat earnings estimates twice in the past four quarters and missed on the other two occasions, the average surprise being 3%.

Price and Consensus: BKD

In-Depth Zacks Research for the Tickers Above

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Brookdale Senior Living Inc. (BKD) - free report >>

The Ensign Group, Inc. (ENSG) - free report >>