Nibbling at $26.65.
Lincare Holdings is a provider of oxygen and related respiratory services
to patients in the home. Lincare's customers typically suffer from
chronic obstructive pulmonary disease and require respiratory therapy
services to alleviate their symptoms. The company serves over 320,000
customers in 44 states through 550 operating centers. Lincare's oxygen
and related respiratory services currently account for nearly 90% of its
sales. In addition, the firm offers its customers a variety of infusion
therapies in certain geographic markets and provides its customers with
home medical equipment and supplies.
Lincare's customers typically come via referral from a physician or
hospital discharge planner. During the period where a home respiratory
company provides services for a customer, the patient typically remains
under the physician's care. Thus, physicians are very selective about
which firm they choose to recommend. After Lincare diagnoses a new
customer, one of the company's representatives administers the prescribed
therapy in the patient's home. The frequency of the Lincare
representative's patient visits depends on the type of therapy being
administered.
LINCARE: A LEADING CONSOLIDATOR OF THE HOME RESPIRATORY THERAPY MARKET
The home respiratory therapy market has historically been a fragmented
market filled with dozens of local and regional operators. Over the last
few years, however, this market's dynamics have changed dramatically with
the emergence of acquisition-hungry players like Lincare that have rapidly
"rolled-up" the sector. By acquiring and integrating over 150 home
respiratory companies to date, Lincare has emerged as one of the nation's
largest home respiratory therapy firms in the past few years. In 2001,
Lincare gobbled up 18 local or regional companies with operations in 12
states.
The company hasn't grown just via acquisitions, though. Lincare added a
record 39 new locations through internal expansion last year. This
internal and organic growth led to the opening of 54 new Lincare operating
centers during 2001. The long-term growth outlook for Lincare's market
continues to look promising. The firm estimates that the home respiratory
market is now roughly $4 billion in annual sales, with growth in services
estimated at approximately 7% per year over the last five years. Aging
U.S. "baby boomers" should keep this growth rate steady (if not
increasing!) for years to come.
SELLING "AIR" OFFERS FAT MARGINS AND JUICY PROFITS
It's easy to see why Lincare CEO John Byrnes has moved aggressively over
the past few years to consolidate the home respiratory therapy market.
Not only does the home respiratory services market have years of growth
still ahead of it, but the business also inherently has great profit
margins. Thus, for good operators, selling "air" (oxygen) can be
super-profitable (and even more so with the size and scale that a firm
like Lincare enjoys). For example, Lincare posted a 2001 gross margin of
roughly 85% and enjoyed operating margins of nearly 30%.
For 2001, Lincare saw sales rise 16% to $810 million, as operating income
rose 24% to $145 million before special items. Overall, the company's
financial position looks very solid right now. Lincare's long-term debt
(including current maturities of bank debt) currently stands at a little
over $200 million. This represents a very manageable
debt-to-total-capitalization ratio of 22%. With Lincare generating over
$230 million in cash from operating activities last year, we have the
utmost confidence that the firm will not run into any problems servicing
its debt in the near future.
2002 consensus calls for Lincare to report earnings per share of $1.68 on
revenue of $950 million, a 17% increase in sales. Looking further out,
analysts expect Lincare to top $1 billion in sales ($1.1 billion) for the
first time in fiscal 2003 and for the respiratory therapy company to
generate earnings of $2.00 per share. We believe all of these
aforementioned targets are very achievable. Lincare has posted average
earnings growth of nearly 20% over the past three years, and we expect
this brisk growth rate to continue over the next three-to-five years.
GREAT BUSINESS MODEL AT AN ATTRACTIVE VALUATION
In summary, we find little not to like about Lincare's future. For one,
the company generates great margins (gross margins of 80% and operating
margins of 30%) and solid bottom-line profits. Further, the respiratory
therapy services market continues to grow at a steady clip (7% per year),
and Lincare has established itself as one of the leading consolidators of
this industry. Finally, we believe that Lincare's dominant size and scale
will allow the firm to capture new sales (via internal and
acquisition-driven growth) while squeezing back-end operating costs.
Overall, we also like the simplicity of Lincare's business. It's easy to
see how the company sells its services, generates cash and posts profits.
We believe its business is a good play on the aging U.S. population (the
older we all get, the more likely that MANY of us will, unfortunately,
develop respiratory problems). Plus, Lincare's stock trades at a very
affordable price. With a forward P/E ratio of less than 15, Lincare is
valued at a significant discount to the S&P 500's P/E of the mid- to
high-20s, yet the firm offers a higher long-term growth rate than this
benchmark index.
Todd Shaver
Editor in Chief
BullMarket.com
Washington, DC USA |
