Investors looking to play the U.S. health care sector are scoping out TSX-listed Medical Facilities Corp., although analysts say now may not be the best time to buy.
Shares of the Toronto-based company, which owns majority positions in five specialty surgical hospitals in the U.S. Midwest and an ambulatory surgery centre in California, have slipped since hitting a 52-week high earlier this year.
While the company, also known as MFC, has a healthy dividend yielding 6 per cent, analysts are concerned about the company's future growth prospects. All three that cover the stock have a "hold" or equivalent rating on the name.
"There are reasons to hold the stock," said National Bank Financial analyst Trevor Johnson, who has a $17 price target. He cites the dividend and exposure to U.S. health care as positive, especially at a time when the economy is expanding and as the aging baby boomer population is likely to rely more heavily on the health care system.
However, Mr. Johnson cites "constraints on growth," which are the result of the Patient Protection and Affordable Care Act, also known as "Obamacare."
The Act puts pressure on reimbursement rates for U.S. physicians for programs such as Medicare (for patients 65 and older) and Medicaid (for low-income individuals). It also prevents the formation of new physician-owned hospitals, which includes MFC. This is meant to prevent doctors from focusing their work on patients at higher-end specialty centres instead of local hospitals where doctors are also needed.
The company has five physician-owned surgical centres, three in South Dakota and one each in Oklahoma and Arkansas, which focus on orthopedic, ear, nose and throat care, neurosurgery and other specialty surgical procedures.
In a recent conference call with investors, MFC chief executive Dr. Donald Schellpfeffer said the company is well positioned to grow given that 97 per cent of its revenues come from its surgical centres in U.S. Midwest, which have below-average unemployment rates and strong economic growth.
He said a combination of a growing population, longer lifespans and more people with access to health insurance will drive increased demand for MFC's services.
While MFC can't open new centres, it can grow through acquisition, which Dr. Schellpfeffer said company is pursuing. It's also recruiting more doctors to help expand care at its centres.
"We believe that increases in the number of physicians holding medical staff privileges and/or ownership interest in our centres are one of the best methods of positively impacting our results," Dr. Schellpfeffer told investors on Nov. 13, according to a transcript of the third-quarter earnings call.
MFC beat analyst expectations when it reported a 5.5-per-cent increase in quarterly revenues to $77-million (U.S.), compared with the same period last year. Income from operations rose 6.2 per cent to $21.3-million.
RBC Dominion Securities analyst Douglas Miehm increased his target to $19 from $18 after the earnings were released, citing an improved outlook.
"Given the stable cash flows, cash reserves, and solid organic growth opportunities due to an aging population and higher quality of care rankings relative to its peers, Medical Facilities, in our opinion, remains an attractive alternative for yield-oriented investors," Mr. Miehm said in a report.
Canaccord Genuity analyst Neil Maruoka has a $17.50 target, citing weaker operating margins in recent quarters which he said in a note "may be indicative of reimbursement pressures going forward."
Paul Gardner, partner and portfolio manager at Avenue Investment Management, which owns the stock, likes its health care business model and the rich dividend.
"The desirable piece of this company is its sustainable payout, that it's defensive in nature and it's not cyclical," said Mr. Gardner.
The stock has pulled back since hitting a 52-week high of $20.77 in April, but Mr. Gardner said his firm is staying put.
"We wouldn't increase our position or decrease it, but we are happy to hold it," he said. "It's a nice diversified play."
A previous version of this story contained outdated information from Canaccord Genuity, which was provided in error. Canaccord has a $17.50 target on the stock, not $15.50 as stated in a previous report.