Is Brookdale Senior Living (BKD) A Good Stock To Buy?

While some investors focused on large-cap healthcare stocks during the fourth quarter of 2013, such as the purchase of HCA Holdings Inc (NYSE:HCA) by Larry Robbins‘ Glenview Capital and Sean Cullinan‘s Point State Capital, we believe the following stock, which is a smaller company operating in the same industry, could be a more compelling idea.

Activist investor Michael Novogratz of Fortress Investment Group is the largest shareholder of Brookdale Senior Living, Inc. (NYSE:BKD), a stake he has maintained for several years. Other hedge fund managers joined him during the fourth quarter by purchasing additional shares of the healthcare facilities provider, including James Dinan of York Capital Management, Jacob Gottlieb of Visium Asset Management and Thomas Ellis / Todd Hammer of North Run Capital.

YORK CAPITAL MANAGEMENT

Brookdale Senior Living, Inc. (NYSE:BKD) is a $4.2 billion market capitalization company that is the largest provider of senior housing in the United States, operating 649 communities (47% of which it owns) across 36 states (of which Florida and Texas are the two largest) with capacity to serve approximately 67,000 residents. The company generates annual revenue of $2.5 billion, 80% of which is from private pay sources (as opposed to relying on Medicare, Medicaid or insurance).

Similar to other senior housing providers, Brookdale Senior Living, Inc. (NYSE:BKD) enjoys favorable secular trends, including growth in the senior population (which is three times faster than the base population) and a favorable supply-demand fundamentals (only 1.9 million units serving 12.0 million seniors, or a 15% low penetration rate, while new construction remains low). In addition, BKD’s value proposition is its status as the only provider with scale across the continuum of senior living (from at home service to active housing) with a fully integrated platform to provide ancillary services (such as home health, therapy and hospice) to its residents. The company has an ongoing development-growth plan called Program Max that will reposition / expand its community portfolio, adding higher levels of care / services and generating 12-15% unlevered returns.

In February 2014, BKD agreed to acquire smaller peer Emeritus Corporation (NYSE:ESC) for $2.8 billion (including the assumption of $1.4 billion in ESC’s debt), further entrenching its status as the largest owner-operator of senior housing in the nation, with $4.9 billion of annual revenues (over 80% of which is from private pay sources). BKD expects to generate up to $100 million of revenue synergies annually from expanding its existing products / services and reduce operating expenses by up to $45 million annually. Offering new products / services to the combined company’s 100,000 residents should provide further synergies.

Following a strong rally in the stock after the fourth quarter earnings release and deal announcement, the shares are not cheap, trading at a forward EV/EBITDA multiple of 14.0X versus 8.3X for its peer group of healthcare facilities. This premium likely reflects positive investor sentiment regarding the ESC deal. However, since the merger announcement on February 20, 2014, the combined market capitalizations of the two companies increased by roughly $900 million, which is lower than the $1.45 billion present value of the known revenue and cost synergies management announced ($145 million annually discounted at a 10% rate). With additional synergies from new offerings as well as a higher value for the combined company’s real estate portfolio (to which Brookdale Senior Living, Inc. (NYSE:BKD) will apply its Program Max), there seems to be more upside to the shares, even if management is not fully able to realize its revenue and cost synergy targets in the near-term.

Disclosure: none

Recommended Reading:

Senator Investment Group Reports New Position In Brookdale Senior Living Inc. (BKD)

Fortress Investment Group Raises Position In Brookdale Senior Living Inc. (BKD)

Invesco Boosts its Stake in Brookdale Senior Living, Inc. (BKD)

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!