The Ensign Group (ENSG)

Healthcare services company The Ensign Group (NASDAQ:ENSG). met Wall Street’s revenue expectations in Q1 CY2025, with sales up 16.1% year on year to $1.17 billion. Its non-GAAP profit of $1.52 per share was 1.9% above analysts’ consensus estimates.

Company Overview

Founded in 1999 and named after a naval term for a flag-bearing ship, The Ensign Group (NASDAQ:ENSG) operates skilled nursing facilities, senior living communities, and rehabilitation services across 15 states, primarily serving high-acuity patients recovering from various medical conditions.

The skilled nursing services industry provides specialized care for patients requiring medical or rehabilitative support after hospital stays or for chronic conditions. These companies benefit from stable demand driven by an aging population and recurring revenue from Medicare, Medicaid, and private insurance. However, the industry faces challenges such as thin margins due to high labor costs and stringent regulatory requirements. Looking ahead, the industry is supported by tailwinds from an aging population, which means higher chronic disease prevalence. Advances in medical technology, including using AI to better predict, diagnose, and treat illnesses, may reduce hospital readmissions and improve outcomes. However, headwinds such as labor shortages, wage inflation, and potential government reimbursement cuts pose challenges. Adapting to value-based care models may further squeeze margins by requiring investments in training, technology, and compliance.

The Ensign Group competes with other skilled nursing facility operators such as Genesis Healthcare, The Pennant Group (NASDAQ:PNTG), Brookdale Senior Living (NYSE:BKD), and Encompass Health (NYSE:EHC), as well as regional providers in its various markets.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $4.42 billion in revenue over the past 12 months, The Ensign Group has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, The Ensign Group’s sales grew at a solid 15.5% compounded annual growth rate over the last five years. Its growth beat the average healthcare company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. The Ensign Group’s annualized revenue growth of 17.6% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

The Ensign Group also reports its number of units sold, which reached 2.54 million in the latest quarter. Over the last two years, The Ensign Group’s units sold averaged 13.2% year-on-year growth. Because this number is lower than its revenue growth, we can see the company benefited from price increases.

This quarter, The Ensign Group’s year-on-year revenue growth was 16.1%, and its $1.17 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 12.8% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is noteworthy and implies the market is forecasting success for its products and services.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

The Ensign Group was profitable over the last five years but held back by its large cost base. Its average operating margin of 8.7% was weak for a healthcare business.

Looking at the trend in its profitability, The Ensign Group’s operating margin might fluctuated slightly but has generally stayed the same over the last five years, which doesn’t help its cause.

This quarter, The Ensign Group generated an operating profit margin of 8.6%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

The Ensign Group’s EPS grew at an astounding 18.4% compounded annual growth rate over the last five years, higher than its 15.5% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

In Q1, The Ensign Group reported EPS at $1.52, up from $1.30 in the same quarter last year. This print beat analysts’ estimates by 1.9%. Over the next 12 months, Wall Street expects The Ensign Group’s full-year EPS of $5.72 to grow 12.7%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

The Ensign Group has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.5% over the last five years, slightly better than the broader healthcare sector.

Taking a step back, we can see that The Ensign Group’s margin dropped by 11.6 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

The Ensign Group’s five-year average ROIC was 17.6%, beating other healthcare companies by a wide margin. This illustrates its management team’s ability to invest in attractive growth opportunities and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, The Ensign Group’s ROIC has decreased over the last few years. Only time will tell if its new bets can bear fruit and potentially reverse the trend.

The Ensign Group reported $344.5 million of cash and $2.01 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $512.1 million of EBITDA over the last 12 months, we view The Ensign Group’s 3.3× net-debt-to-EBITDA ratio as safe. We also see its $11.12 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see The Ensign Group narrowly top analysts’ sales volume expectations this quarter. EPS also beat. Overall, this quarter had some key positives. The stock remained flat at $129.42 immediately following the results.

Updated: June 14, 2025 at 11:54 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in The Ensign Group.

The Ensign Group is a fine business. First off, its revenue growth was solid over the last five years. And while its diminishing returns show management's recent bets still have yet to bear fruit, its astounding EPS growth over the last five years shows its profits are trickling down to shareholders. On top of that, its market-beating ROIC suggests it has been a well-managed company historically.

The Ensign Group’s P/E ratio based on the next 12 months is 23.4x. When scanning the healthcare space, The Ensign Group trades at a fair valuation. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $165.17 on the company (compared to the current share price of $150.93), implying they see 9.4% upside in buying The Ensign Group in the short term.