With histories of revenue growth and relatively low valuations compared to other companies in their sectors, LHC Group (LHCG) and Littelfuse (LFUS -1.25%) look like great stocks to buy now. Each company has outpaced the S&P 500 average over the past decade. Clearly, the businesses must be doing something right.
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LHCG Revenue (Annual) data by YCharts
1. In-home care momentum helps LHC
The aging of our population, along with the rising expense of extended hospital stays, has created a need for more in-home healthcare services, and that's LHC Group's business model. In its fourth-quarter earnings call, the company said that a third-party survey found 86% of adults and 94% of Medicare beneficiaries prefer to recover at home after a hospital stay. The complications caused by the COVID-19 pandemic have further crystallized the need for nursing and recovery solutions in the home. LHC is a partner for more than 400 hospitals. It employs over 33,000 employees to deliver in-home healthcare, hospice, community-based services, and facility-based care.
LHC released its Q4 and full-year 2021 figures on Feb. 24, and the company reported its record revenue of $2.2 billion, up 7.6%, year over year. The company's earnings per share (EPS) was $3.69, compared to $3.56 in 2020. LHC also reported adjusted earnings before interest, taxation, depreciation, and amortization (EBITDA) of $265.5 million, up 11% year over year, making 2021 its seventh-consecutive year of increased EBITDA.
Image source: Getty Images.
The healthcare company's guidance for 2022 anticipates another big year, with revenue between $2.50 billion and $2.55 billion, adjusted diluted EPS between $5.60 and $6.00 a share, and adjusted EBITDA between $270 million and $290 million.
There's little question about the increased need for in-home healthcare. A study by Grand View Research put the market at $320.6 billion in 2021 and anticipates it to have a compound annual growth rate (CAGR) of 7.88% through 2028, reaching a market of $545.1 billion. The greatest difficulty for LHC and other home healthcare companies is maintaining enough staff to meet demand, particularly as there is a shortage of skilled nurses across the industry.
2. Littelfuse is driving toward a strong future
Littelfuse, a Chicago-based company with more than 17,000 employees, manufactures a line of electronic sensors, modules, and fuses used in various industrial, transportation, electronics, and medical device applications. The company is best known for its small fuses for cars, but it is also a key player in making electric vehicle (EV) fast-charging systems.
According to a study by Bloomberg New Energy Finance, EVs represent only 3% of worldwide car sales, but that number is expected to reach 10% by 2025 and 58% by 2040. That will create an increased need for fast-charging stations that can charge an EV in half an hour. Those chargers can supply up to 400 amps to a battery, creating challenges in keeping charger cables cool and preventing ground currents. To provide protection from overload currents and short-circuiting, the direct current charger connected to an alternating current source needs fast-acting high current fuses for safety, the kind made by Littelfuse.
While its products can be small, its earnings certainly aren't. The stock has been down a little more than 4% over the past year, but the company's strong margins and potential make it a good buy, even with supply issues impacting the industry in the short run,
In 2021, the company reported revenue of $2.1 billion, up 44% over the prior year with EPS of $11.38, up 115% over 2020. The company's operating margin was 18.5%, compared to 11.5% in 2020.
The company hasn't been shy about making acquisitions that are helping it grow revenue. Last year, it completed the $315 million purchase of Carling Technologies, which makes switching, circuit protection, and power distribution equipment. That purchase helps open up markets in Japan, India, and Korea to Littelfuse. The company also spent $70 million to acquire Hartland Controls, which makes electrical components used primarily in heating, ventilation, air conditioning, and refrigeration.
On top of that, Littelfuse increased its quarterly dividend last year by 10.4% to $0.53 a share, the 10th consecutive year it has done so. The yield is modest at 0.86%, but the company has increased its dividend with a 12% compound annual growth rate since its inception.
Making a smart choice
Not all value stocks are created equal. Long-term trends should help LHC Group continue to build revenue. However, everyone in the in-home healthcare industry seems to be looking for a solution for staffing shortages, and that may mean maintaining margins will be difficult.
LHC's consistent growth over the past decade in revenue and EBITDA make this a nice value play, particularly with its relatively low forward P/E ratio of 23.88.
Because of its even lower P/E ratio and forward P/E, Littelfuse (21.49 and 17.76, respectively) may be an even better choice. The increased use of electronics in cars, whether they are EVs or not, will continue to help that side of its business. Over the past decade, its growth hasn't been as strong as LHC's, but this past year shows that its business is adapting to market trends. Its strong operating margins and consistent dividend growth make me confident in its future.
