National HealthCare's Integrated Care Model Drives Robust Earnings Amidst Sector Shifts (NYSEAMERICAN:NHC) - NHC Stock Research Report

## Executive Summary / Key Takeaways * Strong Operational Rebound & Growth: National HealthCare Corporation (NHC) delivered impressive operational performance in Q2 and YTD 2025, with adjusted net income surging over 60% year-over-year, driven by strategic acquisitions, robust same-facility revenue growth, and significant reductions in agency nurse staffing expenses. * Strategic Portfolio Enhancement: The accretive White Oak acquisition in August 2024 substantially expanded NHC's footprint and capacity, while targeted divestitures in Missouri optimized its operational portfolio, demonstrating a clear focus on high-value assets. * Operational Excellence as a Differentiator: NHC leverages data-driven quality programs and efficient systems to achieve superior patient outcomes (60% of SNFs are 4- and 5-star rated vs. 35% industry average) and mitigate labor challenges, forming a key competitive advantage in a tight healthcare labor market. * Solid Financial Foundation: The company maintains a strong liquidity position, evidenced by robust operating cash flow, substantial cash and marketable securities, an undrawn credit facility, and a low debt-to-equity ratio, supporting both organic growth and strategic capital allocation, including a recently increased dividend. * Mixed Reimbursement Outlook: While skilled nursing facilities anticipate modest Medicare and state Medicaid payment increases for FY2026, the proposed 6.4% reduction in Medicare home health payments presents a notable headwind for the Homecare and Hospice segment, requiring careful monitoring. ## A Legacy of Care Meets Modern Growth National HealthCare Corporation (NHC), founded in 1971, stands as a venerable institution in the senior healthcare sector, having evolved into a comprehensive provider of integrated care services. Operating across nine states, primarily in the southeastern United States, NHC manages a diverse portfolio including 80 skilled nursing facilities, 26 assisted living facilities, nine independent living facilities, three behavioral health hospitals, 34 homecare agencies, and 33 hospice agencies. This broad service offering, complemented by insurance, management, and accounting services, positions NHC as a holistic care partner for the aging population. The senior healthcare industry operates within a dynamic environment, characterized by the persistent tailwind of an aging demographic, which inherently drives demand for NHC's services. However, this favorable demographic trend is met with significant headwinds, notably the "America's healthcare labor shortage" that has challenged patient census levels across the sector. Furthermore, the industry is heavily influenced by complex and often unpredictable government reimbursement policies from Medicare and Medicaid, alongside increasing regulatory scrutiny, particularly concerning professional liability claims. NHC's overarching strategy is to expand its senior care operations while fortifying its existing markets. This involves a dual focus on enhancing the quality of patient care and driving operational efficiencies. The company actively pursues strategic partnerships with hospital systems, payors, and post-acute alliances to ensure its active participation in the evolving healthcare delivery landscape. This integrated approach, combining various care settings, is a foundational strength, allowing NHC to offer seamless transitions and comprehensive solutions to its patients. NHC's competitive positioning is anchored in its operational excellence and commitment to quality. The company's skilled nursing facilities boast an impressive 60% 4- and 5-star rating from CMS, significantly outperforming the industry average of 35%. This quantifiable quality advantage is a direct result of NHC's internal systems and "performance certification criteria" designed to measure and improve patient care outcomes, such as reducing pressure ulcers, significant weight loss, and falls. These initiatives, while not "technology" in the traditional sense of a product, represent a sophisticated application of data-driven process innovation that enhances patient satisfaction and mitigates professional liability risks. In comparison to direct competitors like Brookdale Senior Living (TICKER:BKD), Encompass Health Corporation (TICKER:EHC), and The Ensign Group (TICKER:ENSG), NHC's integrated service delivery, encompassing hospice and behavioral health alongside traditional skilled nursing and assisted living, offers a more comprehensive care model. This can foster stronger customer loyalty and more stable revenue streams. Financially, NHC demonstrates superior profitability and a healthier balance sheet compared to BKD (TICKER:BKD), with a TTM Gross Profit Margin of 46.46% versus BKD (TICKER:BKD)'s 0.26%, and a Debt/Equity ratio of 0.17 versus BKD (TICKER:BKD)'s 26.60. Similarly, NHC's TTM Operating Profit Margin of 7.72% and Net Profit Margin of 7.20% surpass EHC (TICKER:EHC)'s 0.16% and 0.08%, respectively, and ENSG (TICKER:ENSG)'s 0.08% and 0.07%. NHC's lower Debt/Equity ratio also stands out against EHC (TICKER:EHC)'s 1.31 and ENSG (TICKER:ENSG)'s 1.07, indicating a more conservative financial structure. While competitors like EHC (TICKER:EHC) might lead in specialized rehabilitation execution or ENSG (TICKER:ENSG) in aggressive acquisition-driven growth, NHC's established network and integrated care model provide a robust competitive moat, supported by high barriers to entry in the form of regulatory licensing and substantial capital requirements.

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## Operational Excellence and Strategic Expansion Fueling Performance NHC's recent financial results underscore the effectiveness of its strategic initiatives and operational focus. For the three months ended June 30, 2025, net operating revenues and grant income surged by 24.7% to $374.91 million, up from $300.66 million in the prior year period. This growth was primarily fueled by a 9.6% increase in same-facility net operating revenues and the significant contribution from the August 1, 2024, acquisition of White Oak Management, Inc. The White Oak operations alone added $56.85 million in net patient revenues for the second quarter of 2025.

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The company's operational profitability, as measured by adjusted net income (excluding non-recurring items like unrealized gains/losses on marketable securities), saw a remarkable 64.7% increase to $25.71 million for Q2 2025, compared to $15.61 million in Q2 2024. This trend extended to the six-month period, with adjusted net income climbing 63.1% to $50.55 million. This strong performance highlights NHC's ability to translate revenue growth into enhanced earnings. Segment-wise, Inpatient Services, NHC's largest segment, was a primary driver of this growth, with net patient revenues increasing 32.45% to $325.01 million in Q2 2025. This segment also saw its operating income more than double to $32.42 million, reflecting improved census levels (89.4% in Q2 2025 vs. 89.0% in Q2 2024) and favorable per diem rate increases across all payor types: Medicare (+6.4%), Managed Care (+8.5%), Medicaid (+8.3%), and Private Pay (+9.1%) for the quarter. The Homecare and Hospice segment also demonstrated solid growth, with net patient revenues rising 11.02% to $38.34 million in Q2 2025, supported by the expansion of new hospice agencies in 2024. The "All Other" segment, which includes corporate costs and non-patient revenues, reported an operating loss, largely due to the absence of $9.45 million in government stimulus income present in the prior year. \ A critical operational achievement has been NHC's success in managing labor costs. Despite industry-wide shortages, the company significantly reduced agency nurse staffing expense from $4.10 million in Q2 2024 to just $0.98 million in Q2 2025. This 76% reduction for the quarter, and a 74% reduction for the six-month period (from $9.38 million to $2.47 million), directly contributed to the expansion of operating margins and demonstrates effective execution of its "creative initiatives to retain and attract qualified healthcare professionals." While salaries, wages, and benefits as a percentage of net operating revenues slightly increased to 60.4% in Q2 2025, the substantial reduction in higher-cost agency staffing indicates a positive underlying trend in labor efficiency. ## Fortified Balance Sheet and Prudent Capital Allocation NHC's financial health is robust, providing a solid foundation for future growth and shareholder returns. The company generated strong net cash from operating activities, which increased by 69.3% to $102.07 million for the six months ended June 30, 2025, compared to $60.31 million in the same period last year. This significant cash generation underscores the operational strength and efficiency of the business.

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The company maintains a highly liquid position, with $110.99 million in current cash on hand and $146.64 million in unrestricted marketable equity securities as of June 30, 2025. Further enhancing its financial flexibility, NHC has access to a $50 million revolving line of credit, which remained entirely undrawn at the end of the second quarter, and is compliant with all financial covenants. The company also possesses substantial value in unencumbered real estate assets, offering potential collateral for future borrowing opportunities if needed. NHC demonstrates a disciplined approach to capital allocation. During the first half of 2025, the company used $27.00 million of cash to pay down its long-term debt, reducing its total long-term debt to $102.50 million from $129.50 million at the end of 2024. This debt reduction, coupled with a TTM Debt/Equity ratio of 0.17, positions NHC with a significantly stronger balance sheet than many of its peers. The company also returned capital to shareholders, repurchasing $6.38 million of common stock and paying $18.85 million in dividends during the first six months of 2025. The recent announcement of a quarterly dividend of 64 cents per common share, a 4.9% increase over the prior quarter, signals management's confidence in sustained cash flow generation. ## Reimbursement Shifts and Future Growth Pathways The outlook for NHC is shaped by a complex interplay of demographic tailwinds, strategic growth initiatives, and evolving government reimbursement policies. For skilled nursing facilities, the Centers for Medicare & Medicaid Services (CMS) projects a net 3.2% increase in Medicare Part A payments for fiscal year 2026, effective October 1, 2025. This includes a 3.3% market basket increase, a 0.6% forecast error adjustment, and a negative 0.7% productivity adjustment, though it excludes an estimated $208.4 million reduction from the SNF Value Based Purchasing program. Additionally, state-specific Medicaid increases are anticipated, with Tennessee projecting an annual revenue increase of approximately $3.00 million (or $750,000 per quarter) for FY2026, and South Carolina an estimated $4.20 million annually (or $1.05 million per quarter). These increases provide a degree of stability and growth for the inpatient segment. However, the Homecare and Hospice segment faces a more challenging reimbursement landscape. CMS's proposed rule for fiscal year 2026 Medicare home health payments projects a significant 6.4% decrease, effective October 1, 2025. This reduction stems from a 3.2% market basket update, a 0.8% productivity cut, a 4.1% permanent reduction to prevent future overpayments, and a temporary but indefinite 5.0% reduction to recoup past overpayments. This represents a substantial headwind that NHC's Homecare and Hospice segment will need to absorb through continued operational efficiency and volume growth. Conversely, Medicare hospice payment rates are projected to increase by 2.4% for FY2026, offering some offset. Strategically, NHC continues to pursue growth through development and partnerships. The company's investments in multi-family development joint ventures in Franklin and Hermitage, Tennessee, totaling $3.21 million in the first half of 2025, indicate a broader vision for senior living solutions. The recent "One Big Beautiful Bill Act (OBBBA)," signed on July 4, 2025, which makes 100% bonus depreciation and other tax benefits permanent, is currently being evaluated by NHC and is expected to impact its deferred tax balances, with full details to be disclosed in the 2025 Form 10-K. This tax certainty could provide additional capital for future investments. ## Key Risks on the Horizon Despite NHC's strong operational and financial performance, several risks warrant investor attention. Professional liability remains a significant concern in the long-term care industry, with an increase in personal injury/wrongful death claims. The defense of these lawsuits can incur substantial legal costs, and there is a possibility that claims could exceed NHC's insurance coverages and reserves, potentially impacting financial results. The company's self-insurance for workers' compensation and professional liability, while managed with independent actuarial assistance, means it retains significant risk. Goodwill, currently at $170.48 million, is subject to annual impairment tests and could be affected by changing market factors, leading to potential future impairment losses. Furthermore, the complex and often changing landscape of government regulations governing Medicare and Medicaid programs poses a continuous risk. Non-compliance, or adverse changes in interpretation, could result in fines, penalties, or exclusion from these critical programs. State Medicaid plans, in particular, are subject to budget constraints, and some states may not keep pace with healthcare inflation, potentially pressuring revenues. A notable competitive dynamic involves the master lease with National Health Investors (TICKER:NHI) for 28 skilled nursing facilities, five assisted living centers, and three independent living centers, which expires at year-end 2026. While Land & Buildings Investment Management has highlighted this as a potential risk for NHC, suggesting the lease was "egregiously one-sided," other analyses indicate NHC's strong financial position, including low debt and rising cash, could enable it to absorb rent increases or even purchase the properties outright. This situation bears close watching as the expiration date approaches. Finally, the proposed 6.4% reduction in Medicare home health payments for FY2026 represents a direct and material financial risk to NHC's Homecare and Hospice segment. ## Conclusion National HealthCare Corporation has demonstrated a compelling investment thesis built on a foundation of operational resilience, strategic growth, and disciplined financial management. The company's recent performance, marked by robust adjusted earnings growth and significant cost efficiencies in labor, reflects the successful execution of its integrated care strategy and its commitment to quality patient outcomes. NHC's strong balance sheet, characterized by ample liquidity and a conservative debt profile, provides the flexibility to navigate industry challenges and pursue future growth opportunities, including a consistent return of capital to shareholders through dividends and share repurchases. While the senior healthcare sector faces ongoing complexities from labor shortages, regulatory shifts, and evolving reimbursement models—particularly the proposed Medicare home health payment cuts—NHC's established market position, operational excellence, and strategic focus on integrated services provide a durable competitive advantage. The company's ability to leverage its operational "technology" to deliver superior care quality and manage costs effectively positions it to capitalize on the long-term demographic tailwinds. Investors should recognize NHC's proven ability to adapt and thrive in a challenging environment, making it a compelling consideration for those seeking exposure to a well-managed leader in the senior healthcare space.