Patient Home Monitoring’s stock chart, shaped like a symmetrically tall hill, tells a story of a Company with a superior growth via acquisition strategy, battled by fearing investors about the ability of new management to successfully integrate new businesses and deliver on the high revenue run rate.
Alex Cutulenco | October 21, 2015: Patient Home Monitoring’s (TSXV: PHM) stock chart, shaped like a symmetrically tall hill, tells a story of a Company with a superior growth via acquisition strategy, battled by fearing investors about the ability of new management to successfully integrate new businesses and deliver on the high revenue run rate.
Highlights:
• The Company has issued a lot of new shares in order to finance its acquisition growth strategy, currently sitting on 255.9 million shares outstanding
• Although various acquisitions are providing the Company with a greatly increased revenue run rate (close to $133 million), the integration of different businesses may be an eventual challenge for the Company
• Healthcare sector has been hot over the past several years, returning 30.7% (S&P Health Care Equipment Select Industry Index) between October 2014 and August 2015, but has since subsided, dropping 10.9% over the last three months. This might be putting additional pressure on PHM’s stock price
• Sell-side analysts remain confident about the Company, reiterating a $2.50 price target
To paint a clearer image of what has happened with PHM over the course of the past year, here are some highlights:
Acquisitive Business Strategy – Not Fully Understood By Investors
The Company is keeping with its strategy of operating as an acquisition vehicle, making several acquisitions in 2015 and overall adding to the scale of its aggregate business. PHM employs a three-step process: Term Sheet – Detailed LOI – Definitive Purchase Agreement/Close. The Company’s M&A team now includes nine people looking for profitable targets with annuity-type revenue and large, untapped patient databases. The company plans to expand its client base in an effort to cross sell all services/products to new and existing clients.
Recent Acquisitions:
• Patient-Aids Inc., Ohio-based Company generating approximately $17 million in annualized revenue, with approximately $6.2 million in EBITDA for an estimated purchase price of $35 million. This effectively values the Company at 2.1x Revenues and 5.6x EBITDA
• Sleep Management, a Company operating in 19 states and headquartered in Louisiana, with annualized revenues of more than $42.5 million and EBITDA of more than $18.0 million. The acquisition cost is estimated at $96 million, valuing the Company at roughly 2.3x Revenues and 5.3x EBITDA
• Legacy Oxygen, a company in Kentucky with annual revenues of approximately $3.5 million and EBITDA of approximately $750k for approximate total consideration of $4.2 million. This values the Company at 1.2x Revenues and 5.6x EBITDA
• West Home Health Care, a Company in Virginia, with revenues of approximately $5.0 million and EBITDA of approximately $600k for total consideration of $3.2 million, valuing the Company at roughly 0.6x Revenue and 5.3x EBITDA
• Black Bear Medical (profitable Maine-based company focused on providing home-based healthcare services, including mobility solutions, through several retail locations in Maine and New Hampshire)
• Black Bear Medical was acquired for roughly $4.65 million (combination of cash and issued PHM shares), and with the company’s 2014 revenues at $7.8 million and EBITDA at $1.0 million, this values the Company at roughly 0.6x Revenue and 4.7x EBITDA – good valuation multiples considering the Company hasn’t met full profitability and that synergies might result from the acquisition
Analysts Remain Confident, Reiterating a BUY Recommendation with a Target Price of $2.50
Russell Stanley, an analyst with Mackie Research, initiated coverage of PHM with a target price of $2.25, and has since increased his target to $2.50.
The investment thesis with this Company is fairly simple: provide in-home monitoring and disease management services to an aging U.S. population. It has been noted that patients much rather prefer staying home than either visiting a hospital or staying at elderly care homes. Patients prefer home health care, particularly towards end of life, for reasons including better pain management and comfort, more family support, greater personal control over medical conditions, and of course, familiar surroundings.
Over 40 million Americans are at least 65 years of age, and this is expected to reach 72 million by 2030. In addition, the leading cause of death in older Americans is heart disease, followed by cancer and chronic lower respiratory disease – all factors that add to an increasing American health care spent on the elderly. The Company is trying to attack this market through various closed acquisitions to expand its product portfolio and take a share of this large market opportunity.
Transition of Management
With the acquisition of Sleep Management in June 2015, the Company appointed a new CEO, Casey Hoyt, who co-founded Sleep Management with the objective of becoming the leading respiratory disease management company in the United States. Casey has also successfully managed several other businesses, most recently a worldwide organization offering a comprehensive line of tradeshow display and marketing services based out of Nimlok, Louisiana. We believe that the transition should proceed smoothly, and will be aided by Michael Dalsin for at least a year, as Mr. Dalsin transitions into a role of a non-executive Chairman of the Board.
Alex can be reach at: alex@gravitasfinancial.com
