Solid ResultsThe results overall look solid to me based on what we already knew. Revenue and EBITDA beat vs. guidance is nice. Revenue/case looks to be holding steady sequentially at ~$417/case (remember that we will see this fall next year with the CMS billing code change, but we will get a boost from the number of cases at 235k expected for FY 2018 from the press release vs.~184k in the LTM period).
Assuming that the acquired practices in the quarter have 47% EBITDA margins, we bought them at 4-6x EBITDA, all perfectly fine acquisition mutiples.
To me, no reason to change my view that this Company, assuming no further acquisitions, can do USD$25-26M of FCF in FY 2018, and is in a strong fundamental position given continued access to its very cheap credit facility and the prodigious amounts of FCF that CRH generates.
At least on the US market, investors seem to like it, with the stock up 15% to USD$2.70 after hours. The stock should be way higher than that given what we know, but let's see how Mr. Market responds
Two quick points to respond to some of the discussion from earlier this week:
1. Regarding buybacks, I am firmly of the opinion that the Company is in a very strong fundamental position and should absolutely conduct buybacks. CRHM generates enough FCF and has enough additional liquidity from the credit facility to do both. Rather than a sign of weakness, this would be a sign of strength to the market that management believes in their stock. It would also be extremely value accretive.
Look at the link I included earlier and what Henry Singleton was able to do with share buybacks. USD$26M on 75M shares outstanding is ~$0.35/share in LFCF. Put a 20x on that, and you've got a stock trading close to USD$7/share. Now imagine management taking USD$13M of that cash flow and using it for buybacks next year at USD$2.60/share (to make my math easy). That's 5M shares repurchased, so we've got 70M shares outstanding instead. USD$26M/70M shares outstanding is $0.37/share in LFCF, implying more like USD$7.40-7.50/share. No M&A integration risk. Just pure value creation. And in larger amounts repurchased, we could get much better returns.
Of course, I would love to see insiders also make purchases now that it appears that the immediate M&A pipeline is done and the Q3 results are out. Fingers crossed on this as well.
Also, no way on dividends. They're an extremely tax inefficient way for management to return capital to shareholders, not to mention that they don't create nearly as much value to shareholders given the current multiple on the stock. As long as the stock remains this cheap,
2. Regarding Cologuard, Digitel was citing something I wrote in the past. Of course, I prefer CRHM to specialize if possible, but the point is that the Company can shift if Cologuard really does become a threat to colonoscopies.
Let's see what happens with the call tomorrow. Good luck to all longs!
Best,
PSDFinancier