Every Monday we feature “A Stock to Sell” as our daily post. With every stock or investment we recommend as a sell, we give you a full explanation of why we advise against investing in it at this time.
Extendicare Inc. (symbol EXE on Toronto; www.extendicare.com) is one of North America’s largest retirement- and nursing-home operators. Its 259 long- and short-term senior-care facilities can house 28,401 residents.
The stock fell sharply in November 2014, from over $8, when Extendicare announced an agreement to sell most of its U.S. business for $870 million U.S. in a deal with two investment firms, Formation Capital and an affiliate of Safanad Inc.
These operations generated $868.9 million U.S. of revenue in the first nine months of 2014—more than half of Extendicare’s $1.6-billion U.S. total in that period.
The company will keep 10 nursing homes in the U.S. for now, but it intends to sell them. It will also hold on to two other U.S. businesses: Virtual Care Provider, which supplies computer support and consulting to long-term care providers, and Laurier Indemnity, which insures against liability risks.
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Stock advice: High yield reflects investor uncertainty
Provinces regulate nursing home fees in Canada, and provincial programs provide substantial funding. All of these programs are subject to extensive and frequently changing laws, regulations and standards.
Extendicare’s cash flow is fairly steady, and it is in a growing business. However, finding qualified employees remains a problem for the company and the senior-care industry as a whole. This will get harder as a recovering economy gives workers more options.
Rising interest rates are also a risk, as they would increase the cost of servicing the company’s mortgages. As well, Extendicare faces rising competition from other nursing homes, and from home-care alternatives.
The company plans to use the proceeds of the U.S. sale to expand its Canadian operations, but it is uncertain if it can do so effectively. That adds risk. The stock has a 7.1% dividend yield. This high yield reflects investor uncertainty about the stock’s future.
We don’t recommend Extendicare Inc. If you own the shares, we think you should sell.
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