$6.50
$20.00
bear $6.50
base $14.80
bull $20.00
margin of safety $8.50
market price* $41.87
Pennant Group runs home health, hospice and home care agencies plus senior living communities. At the end of 2025 it operated 172 agencies and 63 senior living communities across Alabama, Arizona, California, Colorado, Georgia, Idaho, Montana, Nevada, Oklahoma, Oregon, Tennessee, Texas, Utah, Washington, Wisconsin and Wyoming. Most revenue comes from Medicare, Medicaid and managed care payers, so payment rules set by the government drive the economics. What we measured. We estimate the cash the business generates for shareholders after subtracting stock compensation, swings in receivables and payables, and only the part of equipment spending needed to stand still. On that basis, earnings power per share was about $0.60 in 2023, $0.78 in 2024 and $1.01 in 2025. Earlier years (2019 to 2022) were distorted by the receipt of $28.0 million of Medicare advance payments in 2020 and the repayment of $21.8 million in 2021, and the company was much smaller, so we anchor on 2024 and 2025, when revenue reached $695 million and $948 million. The anchor is $0.89 per share, the midpoint of those two years. Growth check: earnings per share grew about 30% in 2025, and our first-year growth is 0%, below that, so no reversal of a slowdown is assumed. The first half of 2026 is consistent with the anchor: operating cash flow before working capital was $37.3 million, up from $28.4 million in the first half of 2025, on a share count only about 2% higher. Acquisitions. Pennant grows mainly by buying agencies and communities. In 2025 it paid about $214 million for acquisitions, including 30 home health, hospice and home care agencies in Alabama, Georgia and Tennessee in the fourth quarter, its largest deal to date. That spending sits outside operating cash flow. In 2025 the company borrowed a net $140 million on its revolving credit facility and $100 million through a new term loan (weighted average interest rate 6.1% at year end), and in 2024 it raised $118 million by selling shares. We credit no growth from future acquisitions, because their price and payoff cannot be seen in advance. Base case ($14.80 per share). Earnings stay at $0.89 per share with neither growth nor decline. The 2026 hospice payment update is +2.6% while the 2026 home health payment update is -1.3%, so we cannot credit a net rate tailwind. Value is $0.89 divided by 6%. Bear case ($6.50). The 2026 home health payment rule cuts rates (an estimated $220 million aggregate decrease for providers) and adjusts for differences between assumed and actual provider behavior since 2020. The company also states that newly acquired operations run at lower margins and higher costs in acquisition years, and roughly $240 million of added variable-rate borrowing costs about $15 million of interest a year at the current rate. We start at $0.45 per share, erode 2% a year for ten years, then hold flat at about $0.37. Bull case ($20.00). The 2025 acquisitions, which the company says start at lower margins, mature and the first-half 2026 improvement in cash generation holds, lifting per-share earnings power about a fifth above 2025's $1.01, to $1.20, held flat with no further deals credited. What could make this wrong. Reimbursement is set by the government each year, so a deeper home health cut or a change to hospice payment caps would lower value. Higher interest on the credit facility would also matter. On the other side, the first half of 2026 may understate what the newly acquired agencies will earn once integrated. Working capital swings are large (receivables rose $24 million in 2025) and were removed from earnings power. Our figures reconcile to reported operating cash flow.