ENSG - The Ensign Group: Slowing Growth Rates Could Lead To A Declining Stock Price

2023-10-05 15:54:22 ET

Summary

• The Ensign Group's stock has returned over 25% in the past 33 months, outperforming the S&P 500.
• Technical charts suggest a potential market top for Ensign's stock, with bearish divergences and a bearish trend-line break.
• Ensign's recent Q2-2023 earnings beat expectations, but concerns about future acquisitions and slowing profitability growth remain.

Intro

We wrote about The Ensign Group, Inc. ( ENSG ) back in December 2020 when we were encouraged by the company's consistent record quarterly earnings. Although Ensign's valuation was getting frothy at the time (resulting in us dialing down our Buy rating to a Hold rating), the stock still looked very strong technically due to its continuous pattern of higher highs and higher lows. When we include the company's small dividend, The Ensign Group has returned just over 25% over the past 33 months, whereas the S&P 500 has returned approximately 15.3%.

Although the above returns look impressive, what may surprise investors is that shares of ENSG are actually down approximately 4% year to date. Therefore, let's delve into Ensign's technical charts initially to see how the stock's recent consolidation ties in with what has been happening fundamentally at the company.

Intermediate 5-Year Chart

The most glaring pattern on Ensign's intermediate chart is the difference between the stock's share-price action since early 2021 and the direction of the MACD indicator. Bearish divergences make themselves known when the MACD is well above its zero line (pointing to shares being overbought) but yet continue to weaken to the downside. Suffice it to say, these trends may be a warning of a market-top in the stock. It is feasible that Ensign's recent August top of over $100 a share may very well end up being the top for this stock for quite some time.

Why do we state this? Well, given how MACD trends must be taken seriously on longer-term charts (due to the amount of information digested plus the indicator's ability to read both the stock's intermediate trend and momentum), ignoring such a bearish divergence would only be looking for trouble.

12-Month Daily Chart

On Ensign's daily technical chart, although a clear bearish trend-line break (share-price) has not materialized as of yet (due to the stock's continued capability of printing sustained higher lows), we did get a bearish trend-line break of the OBV line (on balance indicator) which is a sound read on Ensign's recent volume trend. In fact, given how volume trends many times precede share-price action, we would now expect shares of ENSG to steadily drift to the downside from their current levels. Suffice it to say, we do not believe ENSG's undersold MACD reading (which will attract swing traders no doubt) on the daily chart will lead to a sustained rally in Ensign over the near term on this occasion.

Q2-2023 Trends

In the company's recent second-quarter numbers, we witnessed a bottom-line beat ( Q2 GAAP earnings of $1.12 per share) on revenues of $921.35 million. However, the premise of the report was one of caution concerning forward-looking acquisitions, and here is where investors need to be careful. What we mean by this is that Ensign's growth up to now has been the result of successful acquisitions where the company has been able to identify companies with strong leadership, acquire them for the right price, and then place Ensign's working model at the forefront to ensure strong profitability is sustained over the long run.

Management highlighted the Beacon Hill Rehabilitation Center in Washington as a facility that has been able to improve its numbers over the past five years. A common theme here is when facilities are able to bring all of their nursing requirements in-house and reduce costs as a result. Although same-store operations growth is critical to Ensign's growth path with there being plenty of runway for growth in this space, we must remember how Ensign has got to this point (present share price of approximately $91 a share) and valuation for the following reason.

Elevated Growth Concerns

Ensign's book multiple for example comes in at 3.64 over a trailing 12-month average. The company's corresponding sales multiple over the same period comes in at 1.48. Now, although these multiples are not that expensive compared to Ensign's 5-year averages for example (p/b of 4.24 and p/s of 1.54 respectively), bottom-line growth has slowed in the company as we see from the numbers below.

If we take Ensign's year-over-year EBITDA, EBIT, and diluted EPS growth numbers, we see that the company's near-term profitability growth trends are well down on their corresponding 5-year counterparts.

Suffice it to say, Ensign needs BOTH (strong level of acquisitions and same-store operations improvements) to justify its present valuation. Any sustained pullback from its historic growth rates will most likely mean a decline in the share price until the valuation resets somewhat over time.

Conclusion

To sum up, although there remains significant potential for Ensign to improve its same-store operations on present sites, management remains coy concerning the level of acquisitions it will undergo in the upcoming months. Trading conditions whether they be the labor market, interest rates, or the willingness to enter new states all need to be surmounted to keep shares elevated over time. We look forward to continued coverage.

For further details see: