Some high level thoughts Thoughts on WELL after spending a little time on it this weekend.
WELL for Dummies
I have previously called this story a “hot mess.” I tried to figure it out, and if you cut through all the bluster and spin, WELL basically does three things: (i) buys and runs medical practices; (ii) medical eCommerce; and (iii) technology. Some of the company is verticalized, but in the end, most of what they do is provide clinical services to patients. That makes them a technology company in the same way that Canadian Tire is a technology company: they use it to make their offerings better and improve their current operations.
But, but, but what about the virtual services business? That’s digital, isn’t it? Maybe, but it clearly loses money (check financial statement note 22). They also aren’t particularly transparent about the products, product development, number of customers etc. (if I have missed this info anywhere, please point me to it). As an aside, when the CEO talked about “bricks and clicks,” I was magically transported back to 2011. That is EXACTLY the language that old school retailers use when talking about a shift to eCommerce.
Bank lines
The CFO used some very careful language in the conference call around the company’s bank lines. Quoting from the SeekingAlpha transcript: “Will (sic) continues to have room available on undrawn credit facilities in addition to over $200 million in activated accordion features to its credit lines, which could be available, provided covenants are able to be met. I'm also pleased to report that the company is compliant with all covenants related to its credit facilities.”
So she never says that the accordion features are available, she just says they COULD be available provided covenants are met. Then she goes on to say that the company is compliant with all covenants. But she NEVER actually says that the company is compliant with the covenants required to activate the accordion features. Maybe I am reading too much into this, but I live by the Gregory House Rules on management comments.
For those that are sophisticated, I would keep a keen eye on this. There is low risk of insolvency, but juggling the cash might be tricky. Especially if there are constraints around how the bank lines can be used. and given that cash flow is not actually as high as reported for the reasons given below.
Financials
These financials are complex with lots of nooks and crannies for bad news to hide (you never have to worry about good news hiding, management always waves it in your face). For me, that is a big risk factor and weighs against the company.
2021 FS issues - a sample
1. Adding unrecognizable revenue back to adjusted EBITDA. This is just weird, either revenue is recognizable or not, and if it isn’t, then why is it good enough for a non-GAAP number, but not a GAAP number? It’s one thing to reconcile numbers out of net income to get to the metric that management wants to show. It’s quite another to pull numbers out of the sky INTO that same metric.
2. According to their CFO on the conference call (SeekingAlpha transcript): “Net income for Q4 2021 was $707,000 as a result of the finalization of our purchase price allocation for CRH. We took an evidence-based approach to assessing the economic useful life of the assets acquired and found that the useful life is longer than what had previously been utilized as part of our calculations and amortization. We extended the usual life of certain contracts, which resulted in a favorable adjustment to amortization expense in the fourth quarter. “ That’s a lot of words to say that they had much lower amortization in the fourth quarter than in prior quarters. Why does matter?
3. Because if you normalize the amortization and exclude the *ahem* revenue adjustment, WELL would have LOST money in the Adjusted Net Income line. To be clear, even AFTER adjustments, they would have lost money. That makes for a far less compelling headline. But that is stupid say the shills, you need to look at this company on a cash flow basis. Cash flow is rock solid, you can’t fudge that. Or maybe…
Cash flow to shareholders…
The company has had an interesting change in its acquisition strategy in 2021 compared to 2020. In 2020, they made 10 acquisitions, of which only 2 where deals were less than for 100%. In 2021, they made 22 acquisitions, of which 9 deals were for less than 100%. One can make the argument that they are doing strategic deals that best align the interests of the selling principals and WELL. Fair enough.
The issue that it creates in the financials is that these deals are consolidated into the overall financial results, which juices those numbers and makes it look like ALL the revenue and cash flow belongs to WELL. But when you dig a little deeper (not even that much deeper), it becomes clear that much of that cash flow belongs to minority shareholders of the acquired company. In fact, just over 30% of adjusted EBITDA for the year “doesn’t belong to WELL.” How should this be viewed in terms of valuation? Not sure, but taking it into account reduces WELL’s overall value compared to looking at this on a gross basis.
Am I buying any?
Some people will think I am full of it, but I really wanted to. I met two of the exec team back in the mid-2000’s and I thought they were both really good guys. Unfortunately, I believe this stock is almost fully valued today. Will continue to watch its numbers, but in the short term I am putting my money elsewhere.
I plan to do a deeper dive for future reference in case I come back to this. I will post online on a different site, and if you care to read it, message me for a link. I will send it to you when it is done.
In any case, I will be back for the entertainment value here.