The Pennant Group is The Ensign Group‘s latest spin off. If history repeats itself, the new company will succeed.
It has been three weeks since The Pennant Group was spun out of The Ensign Group as a separate publicly traded company. This is not Ensign’s first rodeo when it comes to successful spin outs. Five years ago, it spun out the majority of its real estate assets (and mostly skilled nursing) into CareTrust REIT, which has been among the leaders in shareholder return among healthcare-oriented REITs.
As Ensign grew its senior living and home health and hospice business, management decided that shareholders would benefit from higher valuation multiples if these assets were spun out as well, but not as a REIT.
Ensign has always had a different operating model than most companies, giving nearly complete control to the local Executive Directors who work as a team with other “local” EDs. Basically, they have skin in the game, and they are really incentivized to succeed. So far, it has worked, as the company usually buys underperforming assets at low prices and turns them around.
This is the hope with Pennant as it strikes out on its own with about $330 million in 2019 revenues and an 18% EBITDAR margin. But nearly 40% of its revenues are from the home health side, which traditionally has lower operating margins than seniors housing.
The stock debuted at $15 per share on October 1, hit a high of $21.83 on October 9, and has settled recently in the $17 to $18 per share range. RBC Capital Markets just initiated coverage with a price target of $20, but we believe that may be raised as the company starts ramping up. Let the EDs roll.
