What is LHC Group (LHCG)?

I have been harping about this company for a while now. Even despite its recent price weakness, I remain bullish.

LHC Group (LHCG) is a rural provider of home health care ranging from wound care to rehabilitative services. They are focused on growth through acquisitions of smaller fragmented companies in this area that are "for profit". Year to date, the company has acquired and operates 106 home nursing locations,six hospices, a diabetes self management company, and one home health pharmacy. The company began operations in 1994 in Louisiana and has since grown to 132 locations in Louisiana, Mississippi, Alambama, Texas, West Virginia, Arkansas, Kentucky, Florida, Tennessee, and Georgia.

So you say, big deal! Yawn, next please! I'm bored already. But wait a minute here. Before you turn your attention to another sexier stock with purportedly better growth prospects, consider the following:

1. Home health service is the fastest growing segment in allied health industry.
2. Home health service still commands favorable Medicare reimbursement and it remains one of the few services that has not been cut or reduced.
3. Aging population continues to rise faster and the ages 74 and up is rising the fastest due to improved health technology and science.
4. 27% of Medicare's $327 billion budget goes to care for patients in the final year of life. 27%!
5. Increasingly, hospitals that have in patient nursing homes or hospices are finding that it is not profitable to run these entities in institutional settings.
6. Medicare has increased reimbursement 3.6% for home health care in rural area. The base pay in 2006 was $2264 per 60 day episode.

Now why does this company have a competitive advantage over other smaller players?
1. They have organization and financial discipline to continue to maximize the profits generated from this lucrative field.
2. They are engaged in growing business because the elderly population is growing.
3. They are targeted to specific market segment and thrives there- rural home health care delivery.
4. Repeat business with plenty of opportunity to replenish and grow business.
5. Home health care will continue to grow and consolidation in this space will continue to command premium relative to other services reimbursed by Medicare.
6. Insitutionalized health care continues to sky rocket.

Currently, the company serves 40,000 home health care patients and that number continues to grow by their acquisition of controlling interest in 3 additional home health care agencies. At this rate, we can expect the next five year growth rate to remain above 45%. Their recent YOY quarterly earnings growth was 118.7% and revenue growth was 43.30%. That is phenominal! The forward PE is 16.03 and PEG is 0.96. Debt to equity ratio is minimal at .031 with total debt of $3.84 million and total cash of $26.88 million. This is a well run company with a distinct niche market.

At first glance, you do see some insider selling activity but these are automated selling plans that take place regardless of the stock price and some of the company insiders are compensated in this fashion. It is not like Countrywide's CEO selling activity, which is borderline criminal.

The share prices have come under pressure in the past 3 weeks after the stock hit an all time 52 week high of $33.14, currently trading down at $27.90. Now, the charts are a bit ambiguous with intense selling activity in the past 3 weeks. Currently, the stock trades well below the 50 EDMA, but appears to have set in the bottom as evidenced by the high volume rise and close in the upper end on Thursday and follow through on Friday on lower volume. The point of caution is that on the weekly chart and on the daily chart, it appears that the stock has put in a double top. But it also can be interpreted as a reverse head and shoulders forming on the weekly chart. Take it any way you will, but I also know that the small caps have come under pressure in the past 4 weeks.

I have not found any news or medicare changes in reimbursement that would have changed the fundamentals of the company and I believe that the earnings report on May 1, 2007 will be a good one, possibly breaking through the resistance at $33.14. I continue to hold June $30 options on this and may add in the coming weeks.