National Healthcare Corp.

By Neha Saoji

Martin MaurerYifan Liu

Prateek Baveja

Presented April 30, 2015

Real Client Managed Portfolio

2

Introduction

Company Review

Macroeconomic Conditions

Industry Prospects

Stock Market Performance

Financial Analysis

Financial Projections

Valuation

Recommendation

Agenda

3

May 14, 2014 Purchased 100 shares

@ 55.25 Cost Basis: $5,525

Position and Transaction History

Introduction – Current Position

Stock Performance till date

April 27, 2015 Current price: 64.36 Market Value: $6,436 HPR = 16.5% P&L = $911

December 2, 2014 Hold 100 shares

@$59.82

4

20 day MA consistently above 200 day MA 30 day RSI neither overbought or oversold

Source: S&P Capital IQ

Recent Stock Performance

5

Underperformed Small-Cap Health Care Services Index

Source: S&P Capital IQ

Recent Stock Performance

6

2014 Revenues

Net patient revenues Other revenues

95%

5%

Main Business Activities

Skilled Nursing Care

Rehabilitation Care

Senior Living Services

Home Health Care Services

Source: 2014 10-k.

Business Overview

Other Business Activities

Management, Insurance &

Financial Services

Hospice Services

Provider of Long Term Care Services

7

No individual customer or group of customers account for a significant portion of revenues

Care must be ordered by a physician

Source: 2014 10-K, p. 7

Business Overview

Patients receive funds to pay cost of care from the following sources

MedicareMedicaidPrivate PayManaged Care

Customers Sources of Revenues

8

Alabama (3) Florida (8) Georgia (3) Kentucky (2) Massachusetts (4) Missouri (16) New Hampshire (3) South Carolina (25) Tennessee (53) Virginia (1)

Source: NHC website: http://www.nhccare.com/locations.cfm

Business Overview – Facilities and Programs

16 2

53

3 3

1

25

8

3

4

Skilled nursing & senior living facilities, and homecare programs

9

Management underperformed peers

Source: Bloomberg

Management

10Source: 2014 10-K, p. 12 and p. 33

Strategic Objectives

24 new constructions or facility purchases since Sept. 2013

Growth in assisted living market Expand long-term care operations

2010 2011 2012 2013 20140

100

200

300

400

500

600

700

800

900

620653

653

628

815

Assisted Living Units

2010 2011 2012 2013 201464

66

68

70

72

74

76

7877

75

75

69

74

Total Operating Centers

11

S W

TO

SWOT Analysis

Many private payers (25%)

Integrated business segments

Wrongful death lawsuits

Industry regulation

Decline in occupancy rates

Dependence on third-party payers and reimbursement rates

Aging population Increasing insurance

coverage (Affordable Care Act)

12Source 1: “Number of adults aged 65 and older.“ IBISWorld Business Environment Profiles. IBISWorld. May 2014. Source 2: Federal funding for Medicare and Medicaid.“ IBISWorld Business Environment Profiles. IBISWorld. July 2014.

Macro Review – Industry Drivers

2010

2012

2014

2016

2018

2020

30

35

40

45

50

55

60

Adults aged 65+

Million

s

2015

2016

2017

2018

2019

2020

0200400600800

100012001400

Federal Funding

Aging PopulationFederal Funding for Medicaid &

Medicare

5.8% CAGR

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

Macro Review – Industry Drivers

20132014

20152016

20172018

20192020

200

205

210

215

220

225

230

235

Private Insurance Owners

Increased Private Insurance Ownership

14

58,500 long-term-care providers in U.S. in 2012

Source: CDC/NCHS, National Study of Long-Term Care Providers and Table 1 in Appendix B.

Industry Analysis

No dominant brand in

the industry

Intense competition

in the South and

West regions

Depends on referrals

from acute care

hospitals, physicians & others

15Source: http://www.ahcancal.org/research_data/trends_statistics/Documents/Trend_PVNF_FINALRPT_March2015.pdf

Industry Analysis - Occupancy Rates

16

Despite favorable demographic trends, decreased government funding has hindered growth

Annual Revenue Growth 2010 –

2015 2.9% Expected Annual Revenue Growth

2015 4.8% Expected Annual Revenue Growth

2015 – 2020 5.9%

IBIS World Industry Report 62311: Nursing Care Facilities in the US; Jan. 2015

Industry Outlook

17

Industry Rivalry:

Medium

Bargaining power of suppliers: Medium

Bargaining power of

buyers: Low-Medium

Threat of substitute:

Low

Threat of new entrants:

Low

Porter’s Five Forces

Meet requirements of insurance/Medicare for payments

Long-term relationship with drug providers

Patients can choose from a number of healthcare facilities, but the number is very limited

Barely no substitute can be found within the field

New form of healthcare need time to be developed

Large capital requirement and long time horizon

Accumulated word-of-mouth and reputation

18

Financial RatiosLiquidity Ratios

2009 2010 2011 2012 2013 2014Current Ratio 0.87 0.89 1.06 1.18 1.64 1.61Quick Ratio 0.83 0.86 1.02 1.15 1.60 1.57Cash Ratio 0.52 0.51 0.68 0.76 1.11 1.10

Profitability Ratios2009 2010 2011 2012 2013 2014

Operating Profit Margin 7.56% 8.00% 10.20% 8.97% 9.14% 7.80%Net Margin 5.95% 7.31% 8.40% 7.79% 8.19% 6.12%ROA 5.08% 6.35% 7.51% 6.41% 6.56% 4.97%ROE 7.62% 9.39% 10.62% 9.04% 9.39% 7.27%

Activity Ratios2009 2010 2011 2012 2013 2014

A/R Turnover 10.84 9.35 11.10 9.89 9.88 11.06Fixed Asset Turnover 1.57 1.65 1.80 1.81 1.73 1.69Total Asset Turnover 0.85 0.87 0.89 0.82 0.80 0.81Occupancy Rate 92.00% 92.00% 90.60% 90.10% 89.20% 88.90%

19

Financial Ratios

20

Assumptions

2013A 2014AAverage

(2009-14)Median

(2009-14) 2015E 2016E 2017E 2018E 2019ERevenues:Net patient revenues 735,837$ 829,287$ 879,044$ 930,908$ 985,831$ 1,040,052$ 1,092,055$ % growth 4.3% 12.7% 6.04% 6.76% 6.0% 5.9% 5.9% 5.5% 5.0%Other revenues 53,120 42,396 41,167 40,343 39,940 39,540 39,145 % growth -4.5% -20.2% -3.32% -3.70% -2.9% -2.0% -1.0% -1.0% -1.0%Net operating revenues 788,957 871,683 920,211 971,251 1,025,771 1,079,593 1,131,200 Percent of Revenue Growth (%) 3.67% 10.49% 5.38% 7.05% 5.57% 5.55% 5.61% 5.25% 4.78%Expenses and CostsSalaries, wages and benefits 453,560 510,249 533,722 565,268 599,050 629,402 659,489 % growth 6.24% 12.50% 6.68% 7.10% 4.60% 5.91% 5.98% 5.07% 4.78%Other operating 194,989 217,143 237,414 237,957 246,185 264,500 271,488 % growth -0.63% 11.36% 3.01% -0.19% 9.34% 0.23% 3.46% 7.44% 2.64%Facility rent 39,449 39,731 43,250 46,620 50,263 53,980 57,691 % growth 0.24% 0.71% 1.27% 0.71% 8.86% 7.79% 7.81% 7.39% 6.88%Interest 331 2,165 1,840 1,943 1,539 1,619 1,131 % growth -27.25% 554.08% 97.51% -13.65% -14.99% 5.55% -20.79% 5.25% -30.15%Depreciation and amortization 28,547 34,384 35,357 37,125 38,014 38,915 39,444 % growth -4.18% 20.45% 6.51% 6.48% 2.83% 5.00% 2.40% 2.37% 1.36%Total costs and expenses 716,876 803,678 851,584 888,912 935,051 988,416 1,029,243 % growth 3.48% 12.11% 5.32% 4.73% 5.96% 4.38% 5.19% 5.71% 4.13%

21

WACC Calculation

Cost of EquityRisk-free rate 2.63%Beta 0.78Market risk Premium 6.50%Cost of Equity (CAPM) 7.70%5 Yr Return to Shareholders 12.66%Weighted Cost of Equity 9.19%

Cost of DebtCost of Debt (Pre-tax) 6.23%Tax 37.0%Cost of Debt After Tax 3.92%

Cost of Preferred StockCost of Preferred Stock 5.09%

WACC 7.43%Business Risk Premium 1.00%Discount rate 8.43%

NHC WACC Calucalation5 Yr Beta from regression 0.705 Yr Beta from Capital IQ 0.86Average Beta 0.78

NHC Beta Calculation

5Year (annualized) 12.7%2 Year (annualized) 18.5%1 Year (annualized) 18.6%Half Year 12.9%Three Month 0.7%One Month -1.6%

NHC Return to Shareholders

LT-Debt 10,000PV of lease obligations 322,473Total Debt 332,473 23.9%Common Stock 890,140 63.9%Preferred Stock 170,494 12.2%Total 1,393,107 100%

LT Interest 2.80% 10,000 Operating Lease 4.20% 285,877 Capital Lease 23% 36,596 Total 332,473 Cost of Debt 6.23%

NHC Capital Structure

22

DCF Valuation

FCF Calculation 2014 2015E 2016E 2017E 2018E 2019ENet Income 53,363$ 60,163$ 69,741$ 76,024$ 77,301$ 85,042$ +Depriciation & Amortization 34,384$ 35,357$ 37,125$ 38,014$ 38,915$ 39,444$ -Change in Working Capital (53,298)$ (64,415)$ (58,275)$ (51,289)$ (43,184)$ (33,936)$ -Capital Expenditure (3,859)$ 11,416$ 3,567$ 5,801$ 5,848$ 5,755$

Free Cash Flow 19,689$ 45,023$ 56,948$ 67,184$ 84,795$ Terminal Value 1,607,809

Present Value of FCF 18,158$ 38,293$ 44,669$ 48,600$ 56,569$ Terminal Value 1,072,615$

Total Present Value 1,278,903$ Less: Debt 332,473$ Less: Preferred Stock 170,494$ Plus: Cash 69,767$ Implied Market Cap 845,704$

Number of Shares Outstanding 14100Implied Share Price 59.98$

23

Sensitivity Analysis

Sensitivity Analysis

2.6% 2.8% 3.0% 3.2% 3.4%6.43% $102.77 $109.50 $117.02 $125.47 $135.037.43% $73.60 $77.64 $82.04 $86.85 $92.148.43% $54.49 $57.14 $59.98 $63.04 $66.349.43% $41.00 $42.85 $44.82 $46.91 $49.14

10.43% $30.99 $32.34 $33.77 $35.27 $36.86

Disco

unt R

ate

Terminal Growth Rate

24Company 10-K’s and S&P Capital IQ

Valuation – Comparable Selection

Company Business Focus

Primary Payer Source

Capital Structure

(Liab./Assets)

Profitability (EBIT-

Margin)

Size (No. of

employees)

Ensign Grp. Skilled Nursing

Medicare (35%)

57.6% (1.7%) 25,000

Diversicare Skilled nursing

Medicaid (67%)

90.9% 1.4% 5,150

LHC Group Home care services

Medicare (75%)

32.3% 7% 8,628

Addus HomeCare

Corp.

Home care services

Illinois Dept. of Aging (53%)

29.2% 6.1% 10.790

NHC Skilled Nursing

Medicare (39%)

23.9% 8.1% 13,050

25

Comparable Valuation

Company Name

EV/Total Revenues LTM - Latest

EV/EBITDA LTM - Latest

P/E TTM

Diversicare (NasdaqCM) 0.4x 7.3x 22.6xAddus HomeCare Corporation (NasdaqGS:ADUS) 1.0x 13.3x 25.7xThe Ensign Group, Inc. (NasdaqGS:ENSG) 1.1x 11.9x 27.6xLHC Group, Inc. (NasdaqGS:LHCG) 1.0x 12.0x 26.5x

National Healthcare Corp. (AMEX:NHC) 1.1x 8.3x 20.3x

Summary StatisticsEV/Total Revenues LTM - Latest

EV/EBITDA LTM - Latest

P/E TTM

High 1.1x 13.3x 27.6xLow 0.4x 7.3x 22.6x

Mean 0.9x 11.1x 25.6xMedian 1.0x 12.0x 26.1x

Greenblatt Return on

Capital (Latest)

Greenblatt Earnings

Yield (Latest)

25.1% 9.0%30.9% 6.5%31.3% 6.3%45.8% 7.1%

8.1% 8.7%

EV/EBITDAEnterprise Value 1250.0Less: Total Debt 332.5Less: Preferred Stock 170.5Plus: Cash 69.8Equity Value 816.8/ Total Shares Outstd. 14.1Intrinsic Value/Share $57.9Market Value/Share $63.7

EV/RevenuesEnterprise Value 871.7Less: Total Debt 332.5Less: Preferred Stock 170.5Plus: Cash 69.8Equity Value 438.5/ Total Shares Outstd. 14.1Intrinsic Value/Share $31.1Market Value/Share $63.7

P/EEquity Value 1391.6 Total Shares Outstd. 14.1Intrinsic Value/Share $98.7Market Value/Share $63.7

Average Intrinsic Value

$62.6

26

DCF Valuation -

$59.98

Comparable Valuation

- $62.60

Market Value - $63.69

Recommendation

• Stock just slightly overvalued based on our analysis

Valuation

• New facilities have the potential to boost earnings as evident in the last year

Growth • Demographics are in our favor as discussed

Other factors