PHM stock is trading at an Enterprise Value to Sales ratio of just 0.60
SmallCapPower | September 12, 2016: Patient Home Monitoring’s (CVE:PHM) stock has lost more than 60% of its value since we last wrote about it on October 21, 2015 (see the previous article) and has dropped almost 90% since the stock peaked on April 17, 2015, when it closed at $1.91. However, as management begins to focus on organic growth moving forward and the consolidation and integration of the various business arms that it acquired starts to take shape, there may be a silver lining for its battered share price but it has a tough road ahead of it.
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Recent Highlights:
- Increased gross margin to 72%, up 4% from the previous quarter and 8% from the same quarter last year. This is attributed to the further dropping of uneconomical products and a focus on the higher margin businesses.
- Issued 36 million shares in the nine months ending June 30th, 2016 as part of the acquisition of Patient-Aids Inc. from October 1, 2015. The Company now has over 375 million outstanding shares.
- Bad debt expense increased 295% for this quarter over the same quarter last year, and 320% for the same nine-month period. A portion of this was the entire outstanding accounts receivable of Logimedix, at $1,415,000, being written off due to the winding down of the business.
- The consensus rating of three analysts’ estimates surveyed by Reuters is still a ‘buy’ with a price target of $0.55 for April, 2017.
Management’s Next Steps
Moving forward, management has expressed that they will be steering away from the costly growth by acquisition strategy that they have been employing for the past two years. Instead, now focusing on the realization of synergies of the new businesses and pursuing organic growth that can be gained through the line of products and services they now offer. Although the financials released for Q3 are not very reassuring at first glance, with net income and cash flow for operating activities being negative, most of the expenses can be attributed to one-time costs of winding down Logimedix. In addition, salaries for an inflated headcount due to the acquisitions were a major part of SG&A expenses but that will most likely be corrected as the rationalization of the business continues.
Shareholder Overview
As of April 2016, insider ownership climbed to over 20% as PHM’s new COO Greg Crawford elected to receive the rest of his compensation owed from the acquisition of Patient Aid in stock. This position portrays favourably for PHM, as it tells the market that its management is behind the Company, having a considerable personal investment in it, while still maintaining a large accountability to its shareholders. A number of institutions, such as Blackrock, and BC Investment Management Corporation, remain committed to PHM however, in March and May of this year IA Clarington Investment Inc. and PenderFund Capital Management, respectively, pulled their remaining positions after a number of position cut downs.
Considerations Looking Forward
As revenue continues to increase in line with the forecasted run rate of $133 M, and redundancies in operations are eliminated and the synergies are realized, investors should see a drop in quarterly expenses and potentially a positive net income in Q4. With approximately 61 million baby boomers reaching retirement age over the next 15 years, if PHM can increase the health of its financial statements it will set them up to pursue the organic growth that it is looking for and capitalize on the aging U.S. population.
Other considerations that should be made when judging the overall position and future prospects of Patient Home Monitoring are, but not limited to, the following. Firstly, that management has no set target for capital structure and is not opposed to issuing more shares to raise capital, which would dilute the value for current shareholders.
Secondly, the largest user for Patient Home Monitoring services is the U.S Medicare program, which makes it the largest risk for PHM. With the November election around the corner, although Clinton has held a firm stance on increasing spending on social insurance and U.S Medicare, a Donald Trump victory leaves a big question mark regarding the security of the funding for the program.
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Finally, a large risk factor for PHM is the fact that they do business almost exclusively in USDs but report in CADs, which leaves a large part of its financial performance reliant on where the two currencies are trading against one another. If the CAD goes down against the greenback, costs for the Company rise.
If you are a risk-averse investor PHM might not match your strategy, but with growing revenues, alleged decreasing costs by management, and trading at an Enterprise Value to Sales ratio of 0.60 compared to an average of 2.75 for its peers, there could be some value hidden in this stock.
