One of the main mantra of the world’s best investor, Warren Buffett is to look for companies that have good economic prospects ten or twenty years down the road. While Mr. Buffett is known for his uncanny bottoms-up stock picking ability, he also picks stocks based on the strong characteristics of an industry. For instance, Mr. Buffett likes healthcare stocks in general. In fact, healthcare is the single largest industry in the United States based on GDP. According to the National Healthcare Expenditures report, the industry is poised to expand to 22% of GDP in 2015, compared to the 16.5% of GDP in 2008.
The reason is obvious for astute investors. Aging baby boomers will spend more money on healthcare moving forward. The number of Americans 65 and older is estimated to reach grow 36% between 2010 and 2020, higher than the 9% growth of general population. This in turn will result in large increase in demand for healthcare providers.
A good play on this sector would be Texas-based US Physical Therapy (NASDAQ: USPH). The company operates through subsidiary clinic partnerships in which it owns a 1% general partnership. It also operates some clinics through wholly owned subsidiaries under profit sharing agreements. Its specialty includes outpatient physical and occupational clinics that provide pre-and post-operative care and treatment for orthopedic-related disorders, sports-related injuries and neurological-related injuries. As of December of 2011, it has 416 clinics, including two clinics performing physician services in 42 states.
It reported its third quarter 2012 earnings last month. Revenues for the quarter reached $62.85 million, higher than the previous year’s $59.67 million. This translates to net income of $4.56 million for the period, an increase from last year’s net income of $4.1 million. On a 9-month basis, net revenues increased to $189.39 million and net income came in at $13.89 million, also an increase from the prior year’s net income of $12.74 million.
For the current fiscal year, analysts expect the company to post earnings per share of $1.50. This is an increase of 11%, higher than the industry’s forecasted growth of 7%. Its peers, Skilled Healthcare Group (NYSE: SKH) sees a decline in earnings by 34% this year. Also Kindred Healthcare (NYSE: KND) expects lower income by 18% this year. The solid performance of USPH is attributed to its aggressive expansion through opening of new clinics, as well as acquiring established group of clinics. Out of the 416 clinics, the Company developed 293 and acquired 123 clinics.
For the past year, it opened 21 clinics, acquired 20 and closed 17. Its clinics are in various states, which include Tennessee, Texas, Michigan, Washington, Georgia, Maryland, New Jersey, Wisconsin, Arizona, Florida, Oklahoma, Virginia and Indiana. For the next 5 years, management expects further expansion and sees growth rates of 13% for the period.
The stock currently trades at moderate levels of 14 times earnings. This is below its 5-year high earnings multiple of 19 times. It also trades lower than the average industry earnings multiple of 24 times. It also carries a dividend yield of 1.30%. It recently announced a special dividend of $0.40 per share 2 weeks ago, implying that the company has enough excess cash on top of its programmed capital expenditures. Over time, this strong healthcare bet could provide attractive returns for investors seeking capital gains and steady dividends.