The recent market sell-off has created some attractive entry points for many stocks with solid fundamentals and strong growth prospects. One such stock is Nobilis Health Corp. Analysts are calling for this small-cap health care stock to more than double over the next year and it is profiled below.
The company
Incorporated in British Columbia but with headquarters in Houston, Nobilis Health owns and operates three surgical hospitals and five ambulatory surgery centres in the United States, as well as partnerships with 29 facilities across the nine states.
The company is dual-listed, trading on the Toronto Stock Exchange under the ticker NHC, and on the New York Stock Exchange under the ticker HLTH.
Solid financial results: Second-quarter revenues were $48.9-million (U.S.), rising 224 per cent year-over-year. Total cases increased to 4,780 from 1,646 in the prior year. Revenue per case increased 11 per cent year-over-year to just over $10,000, as the company increased higher reimbursement procedures such as spine surgery.
Positive revisions: In August, management increased 2015 revenue guidance to $233-million from $205-million, and adjusted EBITDA guidance was raised by a smaller degree to $42-million from $41-million, due to costs associated with ramping up volumes from two recently acquired facilities. Adjusted EBITDA margins are forecast to be 18 per cent. In its guidance for 2016, management forecasts revenues grow organically and through acquisitions by 37 per cent to $320-million, adjusted EBITDA is $65-million, and adjusted EBITDA margins expand to 20 per cent. Organic growth is anticipated to be 20 per cent in 2016.
Specialization: The company provides medical procedures that are minimally invasive that can be performed on a low-cost, outpatient basis with an emphasis on specialized procedures in areas such as pain management, bariatric or weight loss surgery, spine surgery, and orthopedic surgery. By offering specialized services, the company is able to achieve greater cost efficiencies and profitability.
Acquisition growth: The recent financing strengthened the company's balance sheet. Nobilis had more than $31-million of cash at the end of the second quarter. Management continues to look for acquisition opportunities at discounted prices, where it can execute a rapid operational turnaround, or where the company can extend its ancillary services in order to capture additional revenues. Nobilis recently acquired Victory Plano Hospital in Texas after the U.S. Bankruptcy Court approved a sale order. The ambulatory surgery centres industry is large and fragmented.
Lower costs: Lower procedure costs are associated with ambulatory surgery centres compared to outpatient services offered by hospitals.
Partnered physicians: Surgeons are equity partners and have a vested interest to ensure the success of the business.
Direct marketing: Nobilis markets specific procedures directly to potential patients through its in-house marketing department. In December, 2014, Nobilis acquired Athas Health, with expertise in direct-to-consumer health care marketing.
Private pay: In the second quarter, 95 per cent of the company's medical services revenue was from private insurance plans and private pay, with only 0.4 per cent from Medicare, and 4.6 per cent from workers compensation.
Valuation
The stock is trading at a single-digit forward enterprise value/EBITDA (earnings before interest, taxes, depreciation and amortization) multiple with room for multiple expansion. Two of the company's peers, Surgical Care Affiliates (SCAI-Nasdaq) and AmSurg (AMSG-Nasdaq), are trading at low double-digit 2016 EV/EBITDA multiples.
Canadian chart watch
Year-to-date, the stock has delivered exceptional results, climbing approximately 77 per cent. There is technical resistance at $6.50, at its 200-day moving average, and technical support near the $6 level. The stock has declined roughly 34 per cent since July 13.
Analysts' recommendations
There are five analysts with buy recommendations and one analyst with a sell recommendation. The average one-year price target is over $13 (Canadian).
The consensus earnings expectations are 21 cents per share in 2015, growing 81 per cent, to 38 cents per share in 2016.
The bottom line
While shares of Nobilis Health have been under pressure, the price weakness is not due to deteriorating company fundamentals. Rather, the price decline is a reflection of profit taking and de-risking. I believe once investor confidence in equity markets is restored, buyers will return to the market and this stock should resume its uptrend as management will continue to successfully execute its disciplined growth strategy.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com