The Pennant Group (PNTG)

Senior living provider The Pennant Group (NASDAQ:PNTG) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 33.7% year on year to $209.8 million. Its non-GAAP profit of $0.27 per share was 13.7% above analysts’ consensus estimates.

Company Overview

Spun off from The Ensign Group in 2019 to focus on non-skilled nursing healthcare services, Pennant Group (NASDAQ:PNTG) operates home health, hospice, and senior living facilities across 13 western and midwestern states, serving patients of all ages including seniors.

The senior health, home care, and hospice care industries provide essential services to aging populations and patients with chronic or terminal conditions. These companies benefit from stable, recurring revenue driven by relationships with patients and families that can extend many months or even years. However, the labor-intensive nature of the business makes it vulnerable to rising labor costs and staffing shortages, while profitability is constrained by reimbursement rates from Medicare, Medicaid, and private insurers. Looking ahead, the industry is positioned for tailwinds from an aging population, increasing chronic disease prevalence, and a growing preference for personalized in-home care. Advancements in remote monitoring and telehealth are expected to enhance efficiency and care delivery. However, headwinds such as labor shortages, wage inflation, and regulatory uncertainty around reimbursement could pose challenges. Investments in digitization and technology-driven care will be critical for long-term success.

Pennant Group competes with other home health and senior living providers including Amedisys (NASDAQ:AMED), LHC Group (owned by UnitedHealth Group, NYSE:UNH), Brookdale Senior Living (NYSE:BKD), and Encompass Health (NYSE:EHC).

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 just $748.2 million in revenue over the past 12 months, The Pennant Group is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, The Pennant Group’s sales grew at a solid 16.2% compounded annual growth rate over the last five years. Its growth beat the average healthcare company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. The Pennant Group’s annualized revenue growth of 24.1% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

We can better understand the company’s revenue dynamics by analyzing its number of admissions, which reached 18,878 in the latest quarter. Over the last two years, The Pennant Group’s admissions averaged 25.1% year-on-year growth. Because this number is in line with its revenue growth, we can see the company kept its prices fairly consistent.

This quarter, The Pennant Group reported wonderful year-on-year revenue growth of 33.7%, and its $209.8 million of revenue exceeded Wall Street’s estimates by 4.1%.

Looking ahead, sell-side analysts expect revenue to grow 13.4% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is noteworthy and indicates the market is baking in 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 Pennant Group was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.2% was weak for a healthcare business.

On the plus side, The Pennant Group’s operating margin rose by 1.6 percentage points over the last five years, as its sales growth gave it operating leverage. The company’s two-year trajectory shows its performance was mostly driven by its recent improvements.

In Q1, The Pennant Group generated an operating profit margin of 6%, up 1.1 percentage points year on year. This increase was a welcome development and shows it was more efficient.

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 Pennant Group’s EPS grew at a remarkable 9.7% compounded annual growth rate over the last five years. Despite its operating margin expansion during that time, this performance was lower than its 16.2% annualized revenue growth, telling us that non-fundamental factors such as interest and taxes affected its ultimate earnings.

Diving into the nuances of The Pennant Group’s earnings can give us a better understanding of its performance. A five-year view shows The Pennant Group has diluted its shareholders, growing its share count by 17.8%. This dilution overshadowed its increased operating efficiency and has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, The Pennant Group reported EPS at $0.27, up from $0.20 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects The Pennant Group’s full-year EPS of $1.01 to grow 12.4%.

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 Pennant Group has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.3%, subpar for a healthcare business.

Taking a step back, we can see that The Pennant Group’s margin dropped by 4 percentage points during that time. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business.

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 Pennant Group historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.1%, somewhat low compared to the best healthcare companies that consistently pump out 20%+.

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. Fortunately, The Pennant Group’s ROIC averaged 2.8 percentage point increases over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

The Pennant Group reported $5.22 million of cash and $280.8 million 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 $58.44 million of EBITDA over the last 12 months, we view The Pennant Group’s 4.7× net-debt-to-EBITDA ratio as safe. We also see its $3.96 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.

We enjoyed seeing The Pennant Group beat analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this was a solid print. The stock remained flat at $26.84 immediately following the results.

Updated: May 16, 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 Pennant Group.

The Pennant Group’s business quality ultimately falls short of our standards. Although its revenue growth was solid over the last five years and Wall Street believes it will continue to grow, its subscale operations give it fewer distribution channels than its larger rivals. And while the company’s growth in admissions was surging, the downside is its cash profitability fell over the last five years.

The Pennant Group’s P/E ratio based on the next 12 months is 26.7x. This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $33 on the company (compared to the current share price of $30.22).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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