Orange County’s nursing home companies have parted ways on Wall Street.
Since August, Irvine-based Sun Healthcare Group Inc. and Lake Forest’s Skilled Healthcare Group Inc. have seen their shares drop more than 40%.
Sun had a recent market value of about $400 million. Skilled was worth about $300 million last week.
The third nursing home operator based here,Ensign Group Inc. of Mission Viejo,is a different story entirely. Its shares are up more than 40% since August with a recent market value of $375 million.
For Sun and Skilled, their declines are partly due to Wall Street’s fall meltdown, which has sent Standard & Poor’s 500 index down about 30% since August.
There also are perennial worries about cuts in government funding for nursing homes.
But the split with Ensign could come down to a big worry on the minds of investors these days: debt.
Ensign seems to be defying Wall Street’s nursing home downturn because of its low debt and ample cash.
The company’s shares even have held up after a federal search of its service center and six nursing homes last month in an ongoing Medicare billing probe.
As of Sept. 30, Ensign had about $60 million in long-term debt and $56 million in cash and equivalents. The company’s debt-to-capital ratio is 20%, less than half that of Skilled and Sun.
At the end of the third quarter, Sun had long-term debt of $668 million and a debt ratio of 48%. Skilled had debt of $468 million for a 46% ratio.
“Even though (Sun and Skilled) don’t have any looming near-term maturities, the fact that they have debt on the balance sheet gets people concerned,” said Rob Mains, an analyst who follows Sun and Skilled for Morgan Keegan & Co., a Memphis-based brokerage.
Ensign’s lower debt provides the company with “ample capital to make more acquisitions and pursue further growth,” wrote Eric Gommel of St. Louis-based Stifel Nicolaus & Co. in a recent report.
Part of Ensign’s strategy is to buy underperforming nursing homes and turn them around, the analyst said.
Nursing home companies got some good news in August when the federal Centers for Medicare and Medicaid Services scrapped a proposed 3.3% cut in payments to operators.
In addition, the government said that “market basket” payments based on the cost of goods and services for nursing home stays would go up by $780 million in 2009.
Obama Effect
But what President-elect Barack Obama’s potential healthcare reform means for nursing homes could be weighing on some operators, according to Morgan Keegan’s Mains.
“Healthcare reform gets people worried about the visibility of future reimbursement,” he said.
Nursing home operators get reimbursed through Medicare, a federally funded health insurance program, and Medicaid, a state-federal program.
Both programs made up 74% of Skilled’s $182 million in third-quarter revenue. They were 69% of Sun’s $457 million in third-quarter revenue. They were three-quarters of Ensign’s $116 million in revenue.
Medicare generally pays for shorter, more rehabilitative nursing home stays. Medicaid pays for longer-term nursing home care.
“Most people come into a nursing home with some money and within a number of months, they spend down all their life savings and they revert to Medicaid,” Mains said.
