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National HealthCare Corporation (NHC)Marnie Georges

Daniel Kleeman

Jason Mudrock

May 1, 2014

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Agenda

• Screening process• Company overview• Recent financial performance• Macroeconomic and industry overview• Management focus• Financial analysis• Financial projections• Valuation• Recommendation

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Our screening process

Major US Exchanges

United States and Canada

Primary industry

classification is not a financial

company

P/BV between 0.5 and 1.5

Market Cap between

$80MM and $800MM

Analysts < 3

Revenue growth since

last year > 3%

Net Income Margin > 3%

LTM P/E < 16

4

Business overview

NHC Skilled Nursing Centers

Assisted Living

Independent Living

Rehabilitation

Pharmacy

HomeCare

Hospice

Accounting & Financial Services

Source: 2013 10-k.

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Business capabilities

• Manage 69 skilled nursing facilities with a total of 8,943 licensed beds• Manages 7 centers for

others• Leases 35 centers from

National Health Investors• Originally spun off from NHC

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3

78

3 2

2

31

10

4

4

Source: 2013 10-k.

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Market power analysis

Strengths• Strong profitability• Ability to renew leased

facilities• All managed centers are

Medicare certified

Threats• Heavy industry regulation• Wrongful death lawsuits

Opportunities• Aging population• Increasing insurance

coverage

Weaknesses• Dependence on Medicare

and Medicaid• Excess capacity

Source: 2013 10-k.

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Recent financial performance

Sources: 2013 10-k, 2012 10-k, 2011 10-k, 2010 10-k.

$600,000 $620,000 $640,000 $660,000 $680,000 $700,000 $720,000 $740,000 $760,000 $780,000 $800,000

2009 2010 2011 2012 2013

Revenue

• Solid yearly growth overall• Year-to-year variability

from business risks• 2013 benefitted from

opening new facilities• Several still under

construction

• Profitability can vary with risk reserves

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2009 2010 2011 2012 2013

Net Income

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Stock market performance

Sources: Yahoo! Finance.

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Industry driversAging

Population

2009

2011

2013

2015

2017

2019

30

35

40

45

50

55

Adults aged 65+

Million

s

2013

2014

2015

2016

2017

2018

0200400600800

10001200

Federal Funding

Federal Funding for Medicaid & Medicare

Increased Private

Insurance Ownership

2013

2015

2017

2019

200205210215220225230

Private Insurance Owners

5.9% CAGR

Sources: 1. “Number of adults aged 65 and older.“ IBISWorld Business Environment Profiles. IBISWorld. Jan. 2014. 2. “Federal funding for Medicare and Medicaid.“ IBISWorld Business Environment Profiles. IBISWorld. Jan.

2014. 3.. “Number of people with private health insurance.“ IBISWorld Business Environment Profiles.

IBISWorld. Jan. 2014.

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Porter’s Five Forces

HIGH

Bargaining Power of Buyers

• Numerous competitors and alternatives available to buyers

• Alternatives to skilled nursing

• Consumer choice limited by insurance plans

Bargaining Power of Suppliers

• Dominant medical suppliers serve all competitors

• Schools with top nursing talent attract multiple industry players

• May customize facilities and use multiple vendors for common goods/services

Entry of New Competitors

• High barriers include specified skills, capital expenditures, and government regulations

• Necessary payor relationships deter entrants

Rivalry Among Existing

Competitors• Numerous

players competing in growing industry for limited payout funds

• Branding becomes important due to sensitive nature of services performed

Threat of Substitutes

• Low use of alternative medicines and healing

• Skilled care is difficult to replicate

MEDIUM LOW HIGH LOW

Sources: 1. Diment, Dmitry. “Nursing Care Facilities in the US.” IBISWorld Industry Report. IBISWorld. Feb. 2014.2. Diment, Dmitry. “Elderly & Disabled Services in the US.” IBISWorld Industry Report. IBISWorld. Feb.

2014.3. Phillips, Jocelyn. “Specialty Hospitals in the US.” IBISWorld Industry Report. IBISWorld. Feb. 2014.

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Health insurance overview

Private Insuran

ce

Affordable Care

ActMedicar

e & Medicai

dSources: 1. “HMOs.” Illinois Department of Insurance. Jun. 2009.

2. “Preferred Provider Organization (PPO) Plans.” Medicare.gov. 3. About the Law.” HHS.gov/HealthCare. U.S. Department of Health & Human Services.

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Management focus

Improve occupancy rates with existing facilities

Diversify revenue streams to include more private payors

Open facilities currently under construction in a timely manner

Source: 2013 10-k.

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Financial analysis

2009 2010 2011 2012 2013Current Ratio 1.41 1.44 1.68 1.82 1.75 Quick Ratio 1.38 1.40 1.64 1.79 1.72 Cash Ratio 0.64 0.36 0.52 0.34 0.38

2009 2010 2011 2012 2013Operating Profit Margin 7.66% 8.07% 10.25% 9.03% 9.18%Net Margin 5.95% 7.31% 8.40% 7.79% 8.19%ROA 5.08% 6.35% 7.51% 6.41% 6.59%ROE (Book Value) 7.62% 9.39% 10.62% 9.04% 9.39%

2009 2010 2011 2012 2013Debt/Assets 0.33 0.32 0.29 0.29 0.30 Debt/Equity 0.50 0.48 0.42 0.41 0.43 Interest Coverage 72.05 113.33 178.99 150.97 218.77

Liquidity Ratios

Profitability Ratios

Solvency Ratios

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Financial analysis

1.36

1.38

1.40

1.42

1.44

1.46

1.48

1.50

1.52

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

2009 2010 2011 2012 2013

Dupont Analysis

Tax Burden

Interest Burden

Operating ProfitMargin

Asset Turnover

ROE

Leverage

2009 2010 2011 2012 2013A/R Turnover 10.84 9.35 11.10 9.89 9.23 Fixed Asset Turnover 1.57 1.65 1.80 1.81 1.73 Total Asset Turnover 0.85 0.87 0.89 0.82 0.80

2009 2010 2011 2012 2013Tax Burden 59.20% 65.08% 65.39% 63.44% 63.24%Interest Burden 131.15% 139.26% 125.34% 136.09% 141.10%Operating Profit Margin 7.66% 8.07% 10.25% 9.03% 9.18%Asset Turnover 0.85 0.87 0.89 0.82 0.80 Leverage 1.50 1.48 1.42 1.41 1.43 ROE 7.62% 9.39% 10.62% 9.04% 9.39%

2009 2010 2011 2012 2013EBIT/Tangible Assets 10.66% 11.94% 16.40% 14.34% 13.93%EBIT/TEV 8.71% 8.26% 11.63% 10.09% 10.34%

Greenblatt Ratios

DuPont Analysis

Activity Ratios

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Discount rateWACC Calculation

Capital Structure

Debt-to-Total Capitalization 29.8%

Preferred Equity-to-Total Capitalization 22.8%Common Equity-to-Total Capitalization 47.4%

Total 100.0%

Cost of Debt

Cost of Debt 5.25%

Tax Rate 36.73%

After-tax Cost of Debt 3.32%

Cost of Preferred Stock

Cost of Preferred Stock 5.09%

Cost of Equity

Risk-free Rate(1) 2.75%

Market Risk Premium 6.51%

Levered Beta 1.14

Cost of Equity 10.17% 70.0%

Return to Shareholders 8.78% 30.0%

Weighted Cost of Equity 9.75%

WACC 6.77%

Business Risk Premium 3.50%

Discount Rate 10.27%

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Projections

Revenue (% Growth Rate)

2009A 2010A 2011A 2012A 2013A

Net patient revenues 6.76% 7.81% -1.41% 4.32%Other revenues 10.48% 1.28% -3.70% -4.49%

Historical figures

Revenue (% Growth Rate)

2014P 2015P 2016P 2017P 2018P

Net patient revenues 4.00% 7.00% 1.00% 5.00% 3.00%Other revenues -2.00% 1.00% -4.00% 0.50% -0.50%

Forecast Figures

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Comparable valuation

Source: Yahoo! Finance.

Comparables Enterprise Value / Price / Growth Rates Profitability

2013A 2014PShare Shares Market Debt/ Enterprise EPS EPS 1 Year Margins

Ticker Price Outstanding Capitalization Equity Value Rev. EBITDA BV Actual Est. Rev. EBITDA EBITDA NILHC Group, Inc. LHCG 20.78 17.79 369.7$ 7.56% 393.0072 0.61 7.00 1.21 15.98 16.18 2.98% -10.50% 8.72% 3.47%Addus HomeCare Corporation ADUS 21.62 10.84 234.4$ 0.00% 218.86066 0.82 12.42 2.06 21.41 20.63 8.85% -0.44% 6.63% 7.20%AMN Healthcare Services AHS 12.48 46.40 579.0$ 73.22% 722.90604 0.71 9.10 2.64 18.09 17.12 6.07% 17.70% 7.85% 3.25%Almost Family Inc. AFAM 21.47 9.41 202.0$ 26.05% 249.9247 0.70 14.36 0.93 23.59 15.94 4.49% -43.51% 4.86% 2.30%Five Star Quality Care Inc. FVE 4.83 48.61 234.8$ 15.11% 249.17879 0.23 5.89 0.74 19.59 24.16 12.55% 2.03% 3.87% 0.43%

Min 4.83 9.41 202.0$ 0.00% 218.86066 0.23 5.89 0.74 15.98 15.94 2.98% -43.51% 3.87% 0.43%Median 20.78 17.79 234.8$ 15.11% 249.9247 0.70 9.10 1.21 19.59 17.12 6.07% -0.44% 6.63% 3.25%Mean 16.24 26.61 324.0$ 24.39% 366.775478 0.62 9.75 1.52 19.73 18.81 6.99% -6.94% 6.39% 3.33%Max 21.62 48.61 579.0$ 73.22% 722.90604 0.82 14.36 2.64 23.59 19.46 12.55% 17.70% 8.72% 7.20%

National HealthCare Corporation NHC 54.73 14.21 777.7$ 1.45% 771.45222 1.00 6.41 1.49 14.14 0.00 3.79% 7.85% 13.80% 8.39%

Multiple Price Weight

P/E 75.79$ 30%P/BV 50.00$ 30%EV/EBITDA 70.64$ 30%EV/Revenue 32.40$ 10%

Price 62.17$

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ProjectionsIncome Statement (% of Sales unless noted) 2009A 2010A 2011A 2012A 2013A

Salaries, wages and benefits 55.07% 55.54% 55.44% 56.10% 57.49%Other operating 27.95% 27.34% 25.43% 25.79% 24.71%Facility rent 5.55% 5.28% 5.14% 5.17% 5.00%Depreciation and amortization (% of PPE) 5.95% 6.22% 6.73% 7.08% 6.25%Interest (% of debt) -3.42% -2.45% -2.23% -2.21% -1.44%Non-operating income 2.49% 3.24% 2.66% 3.32% 3.81%Income Tax (% of EBT) 40.80% 34.92% 34.61% 36.56% 36.76%Dividends to Preferred Stockholders (growth) - -0.02% - -

Income Statement (% of Sales unless noted) 2014P 2015P 2016P 2017P 2018P

Salaries, wages and benefits 58.00% 58.00% 58.50% 58.50% 59.00%Other operating 24.50% 24.00% 23.50% 23.00% 22.50%Facility rent 4.90% 4.90% 4.80% 4.80% 4.70%Depreciation and amortization (% of PPE) 7.50% 7.00% 6.50% 6.00% 5.50%Interest (% of debt) -1.50% -1.25% -1.10% -1.00% -0.90%Non-operating income 4.00% 4.20% 4.40% 4.60% 4.80%Income Tax (% of EBT) 36.50% 36.50% 36.50% 36.50% 36.50%Dividends to Preferred Stockholders (growth) 0.00% 0.00% 0.00% 0.00% 0.00%

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DCF2014P 2015P 2016P 2017P 2018P

Net Income 63,723.14$ 74,390.21$ 77,757.96$ 87,585.49$ 93,547.33$

Plus: D&A 34,945.05$ 33,267.68$ 31,663.71$ 29,958.74$ 28,148.73$ Less: CapEx (46,593.40)$ (42,772.74)$ (38,970.72)$ (34,951.86)$ (30,707.71)$ Less: Change in Working Capital: 4,051.88$ 5,536.42$ 7,204.14$ 4,570.45$ 2,834.05$

Unlevered FCF 48,022.92$ 59,348.74$ 63,246.81$ 78,021.93$ 88,154.30$

Terminal Value 1,212,885.45$

Terminal Growth 2.8%Terminal Value 1,212,885

Discount Rate 10.272%

Terminal Value Assumption Calculation of Implied Share PriceImplied Enterprise Value 990,233$ Less Debt 10,000$ Plus Cash -$ Implied Market Cap 980,233$

Implied Share Price 58.70$

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DCF

Share Price SensitivityTerminal Growth Rate

2.3% 2.6% 2.8% 3.1% 3.3%8.3% $75.80 $78.61 $81.67 $85.04 $88.739.3% $64.30 $66.27 $68.40 $70.70 $73.19

10.3% $55.70 $57.15 $58.70 $60.35 $62.1211.3% $49.03 $50.14 $51.30 $52.54 $53.8512.3% $43.72 $44.57 $45.48 $46.43 $47.43

Dis

coun

t Ra

te

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Price Weighting

Method Price Weight

DCF 58.70$ 50%Comps 62.17$ 50%Combined 60.44$

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Performance relative to comps

Source: Yahoo! Finance.

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Recommendation

Buy• Market Price - $54.73 as of 4/30 market close

• Buy 100 shares with a limit order @ 54.50

• $5,450 position size• Limit order will be good until cancelled