Guzzo the Contrarian

I placed a limit-order for 100 shares of Kindred Healthcare (KND) at $11.25 a couple of weeks ago after noticing that it was trending down.

My order was filled on Friday after KND reached an intra day low of $11.13.

A little primer – Kindred Healthcare is in the business of providing long-term health care. According to their website:

Kindred Healthcare, Inc. (NYSE:KND) is a healthcare services company that through its subsidiaries operates hospitals, nursing centers and a contract rehabilitation services business across the United States. At March 31, 2009, our hospital division operated 82 long-term acute care (“LTAC”) hospitals (6,520 licensed beds) in 24 states. Our health services division operated 228 nursing centers (28,400 licensed beds) in 27 states. We also operated a contract rehabilitation services business that provides rehabilitative services primarily in long-term care settings.

But, why would I buy KND when it’s trending down?

The technicals all read SELL, Morningstar gives it average to poor ratings, and most analysts currently recommend it a HOLD. Along with recent news of decreasing reimbursement rates and talk of healthcare reform coming from the Obama administration, investors are worried and share prices are falling.

It just so happens that all of these are reasons why I’m buying KND… it’s fallen out of favor. IMO, these reasons don’t spell doom for Kindred, they spell opportunity, and I thought $11.25 a good price.

Kindred Healthcare fills a much-needed niche in providing long-term, acute and post-acute healthcare services. With a large portion of the population rapidly aging, this niche will continue to grow, and those services will continue to be needed, regardless of any healthcare reform measures.

Most of Kindred’s business has always come from some type of government reimbursement (medicare or medicaid), and they have plenty of experience and capabilities successfully managing reimbursement issues. They’ve proven these uncanny capabilities many times throughout the years and I believe they can accomplish the same in the future.

I’ve worked for Kindred Healthcare in the past so I know they’re very good at watching the bottom line. As a matter-of-fact, that was the one point that irritated me most while working for them. Their managers were incessantly focused on cost-containment, sometimes to the point of becoming overly-annoying and seemingly cheap.

I also believe Kindred Healthcare to be a solid investment.

One couldn’t consider the fundamental measures fantastic, but Kindred Healthcare is fundamentally-sound and IMO, undervalued currently trading at less than half of it’s book value, carrying a P/S of 0.11, a very reasonable P/E of about 8, and a current ratio approximating 2.0.

According to it’s most recent 10Q, Kindred Healthcare does carry a fair amount of long-term debt ($369 million), but balances that debt with a fair amount of cash on hand ($144 million). They also go on to describe:

Based upon the Company’s existing cash levels, expected operating cash flows and capital spending (including planned acquisition and development activities), and the availability of borrowings under the Company’s revolving credit facility, management believes that the Company has the necessary financial resources to satisfy its expected short-term and foreseeable long-term liquidity needs.

Cash flow has been impacted during this recession, but also according to their 10Q, not significantly enough to impact ongoing operations:

Cash flows provided by operations (including discontinued operations) aggregated $4 million in the first quarter of 2009 compared to cash flows used in operations of $10 million in the first quarter of 2008. Operating cash flows in both periods were negatively impacted by the growth in accounts receivable. Operating cash flows in both periods were favorably impacted by federal income tax refunds of $25 million for each of the three months ended March 31, 2009 and 2008. During both periods, the Company maintained sufficient liquidity to fund its ongoing capital expenditure program and finance ongoing hospital development expenditures, as well as its acquisition and strategic divestiture activities.

Kindred also reported quarterly results exceeding company guidance. Even with the growth in accounts receivable, Kindred Healthcare still manages to be a profitable corporation, reporting a net income of $0.91/share for full year 2008, and $0.58/share for first quarter 2009.

So, although there’s an unknown amount of risk associated with the recently proposed regulatory changes, I would still consider Kindred Healthcare an attractive investment at today’s prices. It’s always possible KND could fall a little further in the short term, but in the long term, the upside potential outweighs any further downside risk.

Kindred Healthcare announced that Paul J. Diaz, President and Chief Executive Officer, will make a presentation regarding the Company at the Jefferies 3rd Annual Healthcare Conference in New York City on Wednesday, June 17, 2009, at 1:30 p.m. Eastern Time. The presentation is being audio webcast and can be accessed at the Company’s website if you’re interested.