Jefferies Raises Skilled Healthcare Group's PT To $16

Jefferies remains buyers of Skilled Healthcare Group SKH believing that its solid 4Q10 results provide further evidence of the company's improving fundamentals and robust growth potential. Given SKH's strong cash flow characteristics, we continue to view shares attractively. Jefferies reiterates its Buy and raises its PT to $16. SKH's therapy services segment posted solid top-line growth of 10.8% Y/Y, although Jefferies presumes operating margins declined due to incremental therapist costs associated with the elimination of concurrent therapy treatments. While Y/Y revenue growth in the company's hospice and home health segment was largely attributable to the May 2010 acquisition of nine hospice and home health companies, it notes that revenue in this division increased ~7% on a sequential basis. During the quarter, the company generated FCF of $26.6MM, of which $22.3MM was earmarked for debt repayment. At the end of FY10, SKH's leverage ratio stood at just over 4x, and given Jefferies expectation that the company will continue to generate strong cash flows, it believes mgmt's leverage target of 3.5x by the end of FY11 is well within reach. SKH closed Monday at $13.54