Best Ideas 2018 - Kindred Healthcare, Inc. (KND) with Gabelli Analyst Jeff Jonas

Gabelli Research Analyst Jeff Jonas discusses his best idea for 2018, Kindred Healthcare, Inc.

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Transcript: Kindred Healthcare is the largest provider of post-acute care in the United Sates, providing everything from home nursing to hospice care to inpatient rehabilitation services. Kindred has 93 million shares outstanding, closing at a price of $9.40 per share, for a market cap of $860 million, plus $3.2 billion of net debt.
The company has struggled for the past couple years, first with the large acquisition of Gentiva Health in 2015 and then dealing with reimbursement cuts for its long term acute care hospitals over the past year. After agreeing to divest its nursing home business in early 2017, the company last month agreed to go private for $9 per share, a very modest premium to where the stock was trading and a price that many are opposing as too low.
There are two parts to the deal that would take Kindred private. Health insurer Humana will team up with two private equity firms to acquire the home nursing and hospice assets. They value that business at $3.15 billion or about 11.5x trailing EBITDA. That multiple is a little less than we had hoped for, but is within the range of comparable deals and is generally acceptable.
The remaining business, consisting of inpatient rehab facilities and long term care acute hospitals is being valued at $900 million, which by our math is just over 3x EBITDA. We think this is far too low. The rehab business is healthy, growing, and generates good cash flow. Similar companies like Healthsouth trade closer to 8x EBITDA. The Long Term Acute Care hospitals are a declining asset that is facing another round of reimbursement cuts later in 2018. We still believe these hospitals are worth a little more than 3x EBITDA, but probably not dramatically so. Each additional 1x EBITDA multiple on these two businesses is worth over $3 per share to Kindred shareholders.
One investor, Brigade Capital, has already gone public saying that the deal price is too low, especially as Kindred finishes up its nursing home divestiture and substantial additional restructuring activities. We generally agree and believe that 2018 will be a significantly better year for Kindred, including generating strong free cash flow to pay down debt. We believe Humana and its private equity partners will need to pay more to get this deal completed. We believe that Kindred can earn $0.75 per share next year, before any benefit from tax reform, and that the company could be worth as much as $18 per share on a sum of the parts basis.



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