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Healthcare Services Group
, based in Bensalem, Pennsylvania, provides housekeeping, laundry and food services to nursing homes and retirement complexes. In other words, it's serving the baby-boom generation.
Over a one-year period, the company has increased revenue 12% and profit 17%. In the third quarter, Healthcare Services generated a return on equity of 15%, beating the averages of its industry and of the
S&P 500 Index
. Earnings per share climbed 46% to 19 cents as revenue rose 17% to $179 million.
The company's margins demonstrate steady improvement. Its quarterly gross margin rose from 13% to 14% and its operating margin stretched from 6% to 7%, helped by a decrease in selling, general and administrative expenses as a percentage of revenue.
Management reiterated that future success is contingent upon improved pricing, expanded service offerings and new contracts. In a tough business environment, the company's strongest selling point is its value.
Large-scale operations and a focus on efficiency allow Healthcare Services to execute certain functions, such as laundering clothes and cleaning rooms, at a lower cost and with faster turnaround than care-givers. As a result, its services are an easy sell to profit-focused administrators.
However, the countercyclical appeal hasn't gone unnoticed. Healthcare Services Group has rallied 22% this year, outpacing the
Dow Jones Industrial Average
and S&P 500. The stock trades at a trailing price-to-earnings ratio of 28 and a forward price-to-earnings ratio of 22, a premium to support-service peers.
Still, the shares offer a 4.1% dividend yield, higher than the S&P 500's average of 2.8%. But a payout ratio over 100% is a cause for concern. In some quarters, the company was unable to fund its distributions with earnings alone, so a decline in business volume might precipitate a dividend cut.
-- Reported by Jake Lynch in Boston.