From the EV/Sales multiple point of view, Patient Home Monitoring seems undervalued with a 1.3x multiple as compared to the peer average of 1.7x
SmallCapPower | July 14, 2017: Patient Home Monitoring Corp. (TSXV: PHM) is a leading healthcare service company in the U.S., providing home-based clinical and testing services. The Company has over 100,000 active patients and operates in 32 states. Patient Home Monitoring offers a wide variety of services for home-based patients and retail services like supplementary sale of equipment for post-hospital needs. At the current price of $0.41, we believe Patient Home Monitoring stock seems attractive given its growth prospects amidst transformation of the healthcare industry.
Investment Thesis
Favorable healthcare demographics driving demand for durable medical equipment
Chronic diseases have been on the rise owing to lifestyle and environmental changes, thus increasing the need for long-term patient care, which in turn would lead to increased usage of durable medical equipment (DME). Diseases such as diabetic foot, pressure ulcers, and cancer, which require long-term patient care and postoperative recovery, are anticipated to contribute toward the growth of U.S. DME market. According to Deloitte, the U.S. healthcare market was valued at $77.8 billion in 2013 and is expected to reach $157 billion by 2022. According to a report by Grand View Research, Inc., the U.S. durable medical equipment market is expected to reach US$70.7 billion by 2025.
CMS indicated that National Healthcare Expenditure is projected to hit US$3.4 trillion in 2016.
Roughly 11,000 Baby Boomers will turn 65 today, and will grow exponentially every day for the next 19 years.
- 26% of the total U.S. population are Baby Boomers
- Hospital readmissions cost the Medicare program $17.5 billion just in inpatient spending, or a 19.2% readmission rate on all Medicare patients
- 25% of people who have Chronic Obstructive Pulmonary Disease (COPD) are discharged from the hospital will be readmitted to the hospital within 30 days or less, and that many of these readmissions are preventable.
Additionally, the increasing global geriatric population base is expected to propel the U.S. DME market. It is estimated that there are over 40 million people in the U.S., aged 65 years and older, and this number is anticipated to double by 2050. Also, technological advancement in healthcare is increasing the average life span of the population, which again would result in long-term care scenarios.
Home treatments gaining increased acceptance
When we compare the cost of home treatment to hospital admission, home treatment stands out. Home healthcare is comparatively economical over hospital stay. Hence, there is a shift among the patients for post-operative recovery and long-term care towards home-care settings. This allows the patients a comfortable/familiar environment where they can be with their families. This is especially true when it comes to post operative healthcare, where patients prefer home care rather than hospital care. Patient Home Monitoring is well poised to cope with the rising demand for home healthcare services, where it can capitalize on the demand for various products.
Growth synergies led by acquisitions
Patient Home Monitoring offers diverse products that help patients with different chronic diseases. The Company is aiming to become a one-stop solution to all the home care related services. To achieve this, Patient Home Monitoring has been making acquisitions. It has acquired 11 companies to grow its market share. Patient Home Monitoring is in a good position to realize synergies from these acquisitions and also implement cost saving initiatives.
Financial Performance
PHM’s 6M’17 revenues are lower than 6M’16 revenues, driven primarily by management’s decision to discontinue unprofitable product lines and business units. The sale of medical equipment and supplies nearly halved during this period. Despite the reduction in revenues, the Company’s gross profit margin increased 12.6 ppt to 79.6% due to high-margin product sales. The largest component of operating expenses, Selling, General and Administrative expenses (SG&A) decreased 10%, which is a healthy sign. EBITDA for Patient Home Monitoring surged to $13.7 million for 6M’17 from a $2 million for the same period last year. 
Peer Analysis
Patient Home Monitoring has a market cap to TTM sales multiple of 1.2x as compared to the peer average of 1.3x. Similarly, from the EV/Sales multiple point of view, Patient Home Monitoring seems undervalued with a 1.3x multiple as compared to the peer average of 1.7x. Additionally, Patient Home Monitoring has the strongest gross margins of 76.4% versus the peer average of 31.9%.
Source: Bloomberg and Company filings
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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