Lincare Holdings: New Dividend is a Breath of Fresh Air

On Monday afternoon, Lincare Holdings (LNCR) announced that they will begin disbursing some of their cash to shareholders in the form of a 20 cent regular quarterly dividend.  The Clearwater, FL company’s primary business is supplying oxygen therapy services and other medical equipment/supplies to mostly elderly patients.  The company provides its services to over 700,000 patients with chronic obstructive pulmonary diseases such as asthma or emphysema.  The company has been on an absolute tear over the last twelve months advancing nearly 130%, and a 3:2 split just took effect last week.  The stock has extended that momentum rising 7.5% on heavy volume following the dividend initiation.

Lincare received an upgrade from analysts at Deutsche Bank (DB) today, and certainly this will make the stock far more attractive to income-oriented investors.  The implied yield of the $.80 annual dividend on yesterday’s closing price would pay investors 2.6% annually, which is nothing to be ashamed off.  This does represent a sizeable portion of their expected earnings for 2010, and based on current estimates the payout ratio comes in above 42%.  With that said, we do not anticipate the company will have trouble meeting such commitments as it has a strong balance sheet and is growing earnings per share at a quick pace (consensus analysts’ estimates show 39% growth this year and then leveling down to 13% growth in 2011).  As their products are most often used by aged patients, there are some encouraging demographic trends as the baby-boomer generation approaches retirement years.  We think it is reasonable to assume high single-digit revenue growth for Lincare for the foreseeable future, aided by their competitive position and a population that is not only aging but living longer as well.

With those positive factors in-mind, it is not all rosy for Lincare as they receive as much as two-thirds of their revenue from reimbursements via Medicare and Medicaid.  Those reimbursement rates have been consistently falling for years, and just last week an analyst at Jefferies & Co. (JEF) downgraded the company from Buy to Hold saying the upcoming 2011 competitive bidding process could be worse than expected.  The conventional wisdom already holds that rates may be reduced from 10% to 18% at that time, so anything worse could certainly apply additional pressure on Lincare.

As for our take, at Ockham, we continue to believe LNCR is Fairly Valued despite the stock’s impressive run.  The company has seen its fundamentals increase steadily over the last year, and the current valuation does not appear to be out of line with historical multiples.  For example, on a price-to-cash earnings basis the company has historically traded for 11.2x to 17.1x, and after today’s rally the stock has just now crossed over the top end of that range to 17.3x.  Also, price-to-sales per share currently stands at 1.91x, which is not particularly troubling considering the company’s historically normal range of 1.72x to 2.55x.  The dividend initiation will be a positive in our analysis; even though it is not necessary to pay a dividend in our methodology, we view initiations and increasing yields positively (obviously cuts negatively).  We are reaffirming our Fairly Valued stance at this time, but after the stock’s tremendous run it is not likely to see an upgrade in the upcoming weeks.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

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