LHC Group, Inc. LHCG
LHCG's 20.6x EBITDA multiple rests on phantom organic growth — excluding the failing Almost Family acquisition inflates growth ~500 bps, masking sub-2% reality and 35-65% downside to $60-$90.
Thesis
Spruce Point argues LHC Group's premium valuation rests on a forensic accounting illusion: management excludes the $1.8B Almost Family acquisition (closed April 2018) from organic sales even ~21 months after closing, inflating reported organic growth from under 2% to ~7%. AFAM throughput has collapsed 31% from pre-deal levels while legacy LHCG locations simultaneously expanded 9%, suggesting cannibalization or integration failure. Management has quietly pushed out integration timelines for two years, increased AFAM bad-debt allowance from $27M to $65M, and destroyed over $100M of shareholder value via purchase-accounting write-downs. Despite spending $1B+ on acquisitions since FY14, FCF per share has shown no growth since FY15. With insiders selling 50% of their stake and CEO Keith Myers cutting his holdings 40%, Spruce Point sees 35-65% downside to $60-$90 once multiples revert toward a ~12x historical norm.
SCQA
LHC Group is a $4.5B post-acute home-health roll-up that completed a transformative merger-of-equals with Almost Family in April 2018, pitched as delivering mid-single-digit organic growth and consolidation-driven earnings power.
AFAM sales have contracted for three straight quarters while management excludes AFAM locations from the organic base long past the normal four-quarter window, inflating reported organic growth by ~500 bps and obscuring a failed integration.
Investors should include AFAM in the organic base, strip purchase-accounting add-backs from FCF, and rerate LHCG's 20.6x EV/EBITDA multiple down toward the 12x peer/historical norm reflecting sub-2% true growth.
Spruce Point sees 35-65% downside to $60-$90 per share on EBITDA valuation, and 52-64% downside to $51-$68 on FCF valuation, as multiples unwind once AFAM is forced into the organic base in FY20.
The three reasons
- 1
Excluding AFAM inflates reported organic growth by ~500 bps; true growth is under 2%
- 2
AFAM throughput collapsed 31% post-deal while integration stalled half-done
- 3
LHCG trades at 20.6x '20E EBITDA — a ~48% peer premium unjustified by fundamentals
Primary demands
- Reevaluate LHCG's premium valuation in light of sub-2% true organic growth
- Include acquired Almost Family locations in organic sales base as they should be
- Scrutinize management's roll-up strategy and integration competence
- Question aggressive purchase accounting adjustments that inflate earnings and FCF
KPIs cited
Pattern membership
Composition what's on the 41 slides
Slide gallery ·
Notes
Classic Spruce Point forensic short. Memorable editorial cover (broken 'We Are Almost Family' diner sign with roaches/rats) plays on the AFAM brand. Core mechanic: same-store-sales exclusion math forcing organic growth from 7% reported to <2% when AFAM is properly included. Strong use of CEO M&A-call quotes ('I don't see this having a negative effect... perhaps even accelerating the growth profile') contradicted by subsequent integration failures. Insider-selling and institutional-outflow slides reinforce credibility attack. No explicit SOTP. Valuation bridge via peer multiple comparison plus historical multiple reversion.