theinvestor22 wrote: As you may know, I think NHC is considerably undervalued and I've been quite positive about the company's prospects, the only caveat being their ability to generate positive free cash flow.
So, let's look at that a bit.
I know others would disagree but, for the 9 months ending 30 Sep 2016, underlying free cash flow was IMHO something like US$9.34M provided by operating activities less US$4.39M for purchases of property & equipment less US$6.25M for distributions to noncontrolling interests = US($1.30M).
Now, we know that Accounts Reveivable days sales outstanding at the end of Q3 (based on Q3 sales) was US$86.17M Accounts Receivable / US$70.68M Q3 sales x 92 days in Q3 = 112.2 days.
That number is very high compared to Q3 of last year (100.0 days), but has actually been declining over the course of 2016 as seasonally high Q4 2015 revenues were collected.
On the conference call, the company stated that technological improvements were being implemented across their facilities which would result in future days sales outstanding declines. They suggested something in the 90s when modeling days sales outstanding for 2017. (This is en route to their eventual goal of 90 days which will typically be boosted upward from time to time when acquisitions are being integrated.)
Given this information, let's look at its impact on the first 9 months of 2016. If the company had achieved say 95 days sales outstanding at the end of Q3 instead of 112.2 days, their Q3 Accounts Receivable balance would have been 95 days outstanding / 92 days in Q3 x US$70.68M Q3 sales = US$72.98M, vs the Q3 actual Accounts Receivable balance of US$86.17M.
That's US$13.19M more cash flow that could've been produced in the first 9 months of 2016 using this fairly conservative approach, which would revise my free cash flow calculation above from US($1.30M) to $US11.890M. That's actually not bad, given that NHC has spent a fair amount additional monies this year on things they didn't have to if the emphasis had been cash flow generation and only modest growth.
SOME of these additional expense items were:
In Q3
- US$2.7M to bring forward advertising from Q4 into Q3
- US$1.1M in Q3 physician marketing expenses which typically produce a return of 5:1
- Almost US$1M in anesthesia and lab services launches
- US$??M for initial ramp up Clarity brand vein and vascular services
- US$??M in litigation expenses
In Q1 (US$1.8M in non-recurring expenses)
- US$??M in continuing legal and accounting expenses related to short attacks
- US$??M investment in technology and infrastructure to accommodate 2016 growth
- US$??M to introduce Concertis
So, had NHC more fully implemented Accounts Receivable related technology and focused on less robust growth, it could've had perhaps something in the order of US$18-19M in 9 month free cash flow.
That's something like US$.23-.25 in total free cash flow per share over the 9 month period, which is about CAD$.30-.33.
I'm thinking that my concerns over cash flow generation are not really that problematic after all.
Of course, at this point, NHC isn't a modest growth company that can immediately translate revenue and earnings into cash flow. If they are to grow to take-over size within the next few years, I'm thinking free cash flow will still lag significantly. Better internal billing systems will go a long way to reducing this issue, though, because Accounts Receivable collection remains the biggest single impediment to free cash flow generation.
That pretty well does it for me as far as big issues go. All of the day to day frustrations, incluing short selling, should turn out to be just noise. I know, noise can seem pretty loud at times, but keeping the ultimate goal in mind should help.