The U.S. senior population is growing rapidly, driven by the aging baby boomer generation. Current projections put Americans age 65 and older at about 82 million by 2050.

Many older adults prefer to remain in their own homes as they age. This trend, together with expanded support for home and community-based care, is fueling higher demand for in-home services.

Revenue in the home health care sector grew by about 50% from 2013 to 2020, and we can expect a similar growth trajectory for this decade.

Addus Homecare (ADUS) serves the aging population with three core offerings: personal care, hospice and home health services delivered in patients’ homes.

Personal care covers daily living assistance like bathing, dressing and meal preparation. Hospice care offers end-of-life support. Home health includes skilled nursing and therapy services.

By intervening early when caregivers spot changes in a client’s condition, Addus helps reduce hospital visits and supports patient comfort in familiar surroundings.

The company operates in 23 states and serves over 105,000 customers.

Growth has been bolstered by targeted acquisitions like Gentiva, which added about $280 million in recurring revenue and expanded Addus into high-growth markets like Texas.

Management’s strategy is to bolt-on acquisitions in new territories, using Gentiva as a blueprint for adding scale and accelerating entry.

All these factors combined enabled Addus to achieve a 61% Uniform return on assets ”ROA” and 19% asset growth last year.

Despite this strong performance, its stock only trades at an 18x Uniform P/E, reflecting the market’s regulatory and competition concerns.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s Uniform ROA to slightly decline to around 58% from 61% last year.

The market doesn’t think that Addus can effectively continue the ROA expansion it achieved in the last 5 years but at the same time, doesn’t price in a sharp decline in profitability.

In early 2024, the Centers for Medicare & Medicaid Services (CMS) finalized a wage-pass-through rule requiring that 80% of Medicaid funds go directly to caregiver compensation.

Management has lobbied for modifications, warning that forcing margins tighter could push smaller providers out of the market and harm patient access, but CMS held firm.

The home care model is inherently labor-intensive, with roughly 35% of staff unionized under SEIU agreements.

High turnover and local minimum-wage increases can further drive up payroll expenses.

Because Addus relies on Medicaid and Medicare reimbursement for over 96% of its revenue, the company’s performance relies on rate resets and reimbursement policies.

The shift toward managed-care organizations adds complexity.

While seniors increasingly pick privatized Medicare Part C plans, those entities often negotiate lower rates and exert more leverage over providers.

Despite these headwinds, Addus operates in a sector insulated from broad economic swings.

Hospice care, in particular, tends to hold up during recessions since it addresses chronic and terminal needs.

Across the U.S. and globally, the over-65 population is growing faster than any age bracket, creating a structural tailwind for home‐based services.

States like New Mexico and Illinois have already passed rate increases, lifting volume and reimbursement in markets where Addus has a strong presence.

Higher Medicaid rates in these states have flowed directly to top‐line growth, partially offsetting wage-rule pressures.

At current levels, Addus doesn’t offer a huge upside.

But its industry position, track record of disciplined acquisitions and exposure to a recession-resistant market can offer a compelling opportunity for investors seeking shelter from economic downturns.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

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