Almost Family

Analyst: Victor Sula, Ph.D. Initial Report June 9th, 2009

AFAM daily

6/08/09

32 30 28 26 24 22 20 18 16 14 © BigCharts.com

1 0.5

Millions

volume

0 Apr

May

Jun

MARKET DATA

Share Statistics (29-May-09) Symbol Current price Low/ High 52 weeks Average Volume Market Cap Dil. Shares Outstanding

FY2007

FY2008

% Chg

AFAM

Revenues, $ Mn.

132.1

212.6

60.9%

$25.56

Gross margin

51.7%

53.4%

170 bp

$14.91 –$53.85

Operating margin

10.5%

13.3%

280 bp

304,918

Net margin

5.8%

7.7%

190 bp

EPS, $

1.40

2.17

55.0%

$217.2 Mn 8.18 Mn

Recommendation Almost Family Inc. (Nasdaq: AFAM) has been pretty aggressive in expanding through acquisitions of other home health agencies, has great fundamentals, good margins, and decent debt. Although there are some concerns around changes in health care policy that may come about, we consider that AFAM is largely immune to those changes and is poised for a strong growth over the time. Accordingly, we rate AFAM with a “Buy” rating.

Highlights The Company has completed multiple acquisitions over the past several fiscal years. Particularly, AFAM acquired the assets of the Medicare certified home health agencies affiliated with Florida-based Central Florida Health Alliance, a two-hospital health care system with home health branches in Leesburg and The Villages. During 2008 AFAM acquired 11 visiting nurse branch locations. These operations added to AFAM’s market presence in Florida, Connecticut, Ohio and Kentucky, and gave it market presence in New Jersey and Pennsylvania. During 2007 the Company acquired five visiting nurse branch locations. The Company intends to continue to actively seek Almost Family Inc. (Nasdaq: AFAM)

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Analyst: Victor Sula, Ph.D. Initial Report June 9th, 2009

Almost Family Inc. and its subsidiaries provide home health nursing, rehabilitation and personal care services in the United States. The Company operates through two segments, Visiting Nurse (VN) and Personal Care (PC). Its VN segment provides a range of Medicare-certified home health nursing services to patients in need of recuperative care, following a period of hospitalization or care in another type of inpatient facility. The Company’s PC segment provides services in patients’ homes on an as-needed, hourly, or live-in basis. AFAM is compensated for its services by Medicare (Visiting Nurse only), Medicaid, other third-party payers (insurance companies and other sources) and private pay (paid by personal funds).

The Company has service locations in Florida, Kentucky, Connecticut, New Jersey, Ohio, Massachusetts, Alabama, Missouri, Illinois, Pennsylvania and Indiana. As of December 31, 2008, the Company operated 41 Medicarecertified home health agencies with a total of 74 locations, as well as 23 personal care locations. AFAM was founded in 1985 and is based in Louisville, Kentucky. The Company is included in the S&P 600 SmallCap and S&P 1500 Super Comp indexes.

acquisition of other quality providers of Medicare-certified home health businesses that provide Visiting Nurse services.

The Company’s 2008 earnings rose 55% to $2.17 per share, compared with $1.40 per share in 2007. Moreover, AFAM’s revenue increased by 61% to $212.6 million from $132.1 million.

In the first quarter of 2009, AFAM generated profits of 60 cents per share, 8 cents better than expectations and 54% above year-ago levels; net services revenues jumped 77% to $69.2 million; a 13.3% earnings surprise; and a 9.8% sales surprise. The Company beat earnings estimates in five straight quarters and is expected to have EPS of $2.74 and $2.94 in 2009 and 2010, respectively, according to Thomson Financial Networks.

In February 2009, the Company was added to the S&P SmallCap 600 Index, which is a U.S benchmark index made up of the securities of 600 companies with a market capitalization of $200 million to $1 billion. The Company has been ranked No. 24 in Forbes’ 2008 listing of the 200 Best Small Companies in America, rising from its No. 77 ranking in 2007. To qualify for the ‘200 Best Small Companies’ list, companies had to have shown a consistent pattern of positive growth over the past 12 months and also over a five-year period. AFAM has also been at or near the top of the IBD 100 for weeks in 2008.

AFAM stock started out the year just below $45. Shares have recovered sharply from their mid-October lows near $30. In fact, that rally took AFAM up to $53.85, and then the next pullback brought it back to $40. In February the stock declined more than 100% for starting-year level because of questions on how the President Obama administration’s budgeting changes might affect private health-care providers. However, the stock has rebounded due to strong quarterly financial performance and the possible restoration of the governmental funding.

Financial Analysis AFAM’s net revenues increased approximately $80.5 million or 60.9% in 2008. Revenue from the Company’s visiting nurse (VN) business almost doubled to $172.9 million in 2008, while personalcare (PC) revenue grew 10.3%, to $39.6 million. The Company is paid for its services primarily by federal and state third-party reimbursement programs, commercial insurance companies, and patients. VN revenues are generated on a per episode basis rather than a fee per visit or day of care.

Approximately 90% of the VN segment revenues are generated from the Medicare program while the balance is generated Almost Family Inc. (Nasdaq: AFAM)

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Analyst: Victor Sula, Ph.D. Initial Report June 9th, 2009

STOCK PERFORMANCE (%) Price Change

GROWTH (%)

Revenues EPS

RETURN ON EQUITY (%) TTM 5 Yr. Avg.

3 Mo.

1 Yr.

3 Yr. (Ann)

17.2

10.3

114.2

12 Mo.

3 Yr CAGR

77.4 51.1

60.9 55.0

42.3 58.1

AFAM

Ind Avg

S&P 500

Last Qtr.

27.9 22.7

10.3 9.7

P/S comparison

Source:Reuters.com

19.7 19.9

from Medicaid and private insurance programs. PC revenues are generated on an hourly basis. Approximately 60% of the PC segment revenues are generated from Medicaid and other government programs while the balance is generated from insurance programs and private pay patients. In the most recent reported quarter ended March 31, revenue was up 77.4% vs. the same quarter a year before; earnings were up 51.1%.

The Company’s net cash of $9.5 million provided by operating activities resulted principally from current period income of $16.3 million, net of changes in accounts receivable, accounts payable and accrued expenses. Accounts receivable days revenues outstanding were 47 at March 31, 2009, 48 at December 31, 2008, and 44 at December 31, 2007, primarily due to a longer average length of stay in the VN segment as a result of higher acuity patients that AFAM serves. At March 31, 2009, the Company had a $75 million three year senior secured revolving credit facility with JP Morgan Chase Bank. The weighted average prime rated based interest rates were 3.59% and 4.84% for the quarters ended March 31, 2009, and 2008, respectively.

Industry analysis By 2050, 16.2% of the global population will be 65 or older, compared with 7.3% in 2005, according to the United Nations Department of Economic and Social Affairs. In the U.S., an enormous population bubble called the “Baby Boomers” is just beginning to hit retirement age. The International Association for Physicians in Aesthetic Medicine estimates that 12,000 Americans turn 50 every day. With the number of Americans over the age of 65 expected to hit 70 million by 2030, seniors will make up nearly one-fifth of the population. The number of octogenarians is expected to triple. In 2006, the United States spent about $2.1 trillion on health care. With an aging population that’s increasing in number, and escalating costs of medical care and technology, that figure is expected to grow 6.7% annually to reach $4.3 trillion in 2017.

Home health care becomes a very popular segment of the healthcare market. Not only do people generally prefer being home versus being in a hospital, but it’s also a lot cheaper than lengthy hospital stays. The home health-care market is forecast to outpace growth in the hospital business. Researcher Datamonitor Group predicts the market will more than double to $7.7 billion by 2012.

The health care industry has experienced, and is expected to continue to experience, extensive and dynamic change. Medicare spending is growing steadily in both absolute terms and as

Almost Family Inc. (Nasdaq: AFAM)

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Analyst: Victor Sula, Ph.D. Initial Report June 9th, 2009

FY07

FY08

132.1 68.3 15.1 14.8 7.6

212.6 113.6 30.2 29.5 16.3

0.5 67.4 17.0 38.8

1.3 160.8 32.0 94.8

PROFITABILITY EBITDA Margin Operating Margin Asset Turnover Return on Assets Return on Equity

11.4% 10.5% 1.12 11.3% 19.6%

14.2% 13.3% 1.86 10.1% 17.2%

DEBT Current Ratio Debt/Capital Interest Expense ($mil) Interest Coverage

1.4 30.5% 0.8 18.5

1.2 25.2% 1.1 26.8

SHARE DATA Dil. Shar. Outst.(mil) EPS Book value / share Institutional Own % Avg Daily Volume

5.53 1.40 7.01 n/a 39,303

8.14 2.17 11.65 62% 205,803

INCOME STATEMENT Net Sales ($mil) Gross profit ($mil) EBITDA ($mil) EBIT ($mil) Net Income ($mil) BALANCE SHEET Cash & Equiv. ($mil) Total Assets ($mil) Total Debt ($mil) Equity ($mil)

Source: SEC filings; analyst estimates.

Q1 08 INCOME STATEMENT Net Sales ($mil) Gross profit ($mil) EBITDA ($mil) EBIT ($mil) Net Income ($mil)

39.0 20.4 4.9 4.8 2.5

BALANCE SHEET Cash & Equiv. ($mil) Total Assets ($mil) Total Debt ($mil) Equity ($mil)

0.3 88.8 37.8 5.6

Q1 09 69.2 36.8 10.4 10.1 5.6

a percentage of the federal budget. Total Medicare spending reached $440 billion for fiscal year 2007, or 16% of all federal spending. Spending on Medicare and Medicaid is projected to grow dramatically in coming decades. Medicare spending only is expected to grow by about 7% per year for the next 10 years.

Meantime, currently there are 3.9 workers paying taxes into Medicare for every older American receiving services. By 2030, as the baby boom generation retires, that is projected to drop to 2.4 workers for each beneficiary.

Analyst opinion Older people need more health care, and they represent a greater percentage of society than ever before. Home healthcare is going to be a “boom” business and any company with activities in this business could be a great investment over time. Moreover, insurance companies push for early release from hospitals. They pick up the needed health care by hiring temporary help to check on patients in their homes. AFAM is one of the leading providers of home health nursing, rehabilitation and personal care services, with 90 locations in 11 states. The Company pursues an active acquisition strategy, buying up local providers to grow its share of the highly fragmented market and increase its margins.

The Company’s earnings have grown at a 67% annualized clip over the past five years, with a return on equity above 22%. AFAM has also surprised on earnings estimates the last five quarters by an average of 22.8%. The earnings are expected to grow 26.3% in 2009 and a 25% growth rate estimated for the next three to five years.

Shares of the Company have risen eightfold in the past five years, even as the current downturn wiped out the gains of many stocks.

With a P/E ratio of roughly 11, Almost Family now trades at its industry’s average and at a valuation that it hasn’t seen the past years. While that’s just a little above where Amedisys and Gentiva sit, it is a premium to other rivals, including industry leader Lincare Holdings. The spectacular growth of the Company in the past, optimistic outlook and aggressive acquisition strategy make us to issue a Buy rating for AFAM.

0.1 160.5 29.8 8.2

Source: SEC filings

Almost Family Inc. (Nasdaq: AFAM)

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Analyst: Victor Sula, Ph.D. Initial Report June 9th, 2009

Consensus Estimates AFAM

FY 2009 31-Dec-09

FY 2010 31-Dec-10

EPS, $ Revenue, $Mil

2.74 282.4

2.94 307.5

consensus estimates are provided by Thomson Financial

1,454 1,174 504.3 1,560 13,871 1,202 238.2

AMED GTIV LHCG LNCR CVH CHE AHCI

2010

%Chg

1,621 1,256 571.0 1,703 12,238 1,244 248.3

11% 7% 13% 9% -12% 3% 4%

Price per Share, $ 30.42 15.93 23.07 21.78 18.05 38.27 1.8

P/E Mrkt. Cap. $ Mn 2009 2010 832.2 460.4 425.4 1,498 2,679 864.3 81.0

AFAM

26.56

217.2

7.26 8.95 10.30 11.59 9.97 10.72 8.18

6.72 8.61 9.61 9.68 7.99 10.18 7.20

9.97

8.61

9.69

9.03

Source: Thomson Reuters; Yahoo! Finance.

8%

Median 282.4

AFAM

Ticker Symbol

Amedisys Inc. AMED Gentiva Health Services Inc. GTIV LHC Group Inc. LHCG Lincare Holdings Inc. LNCR Coventry Health Care Inc. CVH Chemed Corp.n CHE Allied Healthcare AHCI International Inc.

Almost Family Inc.

Revenue, $ Mn

2009

Company Name May-29-2009

Median

Rev. consensus estimates, $Mil. Ticker Symbol

Comparative analyses

307.5

9%

Source: Thomson Reuters.

EPS. consensus estimates, $ Ticker Symbol AMED GTIV LHCG LNCR CVH CHE AHCI

EPS, $

2009 4.19 1.78 2.24 1.88 1.81 3.57 0.22

2010

%Chg

4.53 1.85 2.40 2.25 2.26 3.76 0.25

8% 4% 7% 20% 25% 5% 14% 8%

Median AFAM

2.74

2.94

7%

Source: Thomson Reuters.

Almost Family Inc. (Nasdaq: AFAM)

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Analyst: Victor Sula, Ph.D. Initial Report June 9th, 2009

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I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

Almost Family Inc. (Nasdaq: AFAM)

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