CML Healthcare’s stock has spiralled downhill in the past year, and investors wonder how the company is going to turn things around. CML has lost 21 per cent since last August while the broad S&P/TSX Composite Index is up 10 per cent over the same period.
The problem is that CML is stuck in limbo. Most prominently, the company hasn’t had a leader since May, when the former chief executive officer and chief operating officer both left the firm. With an executive search still in place, CML lacks a strategic vision, notes TD Securities analyst Lennox Gibbs.
On top of that, CML is currently in the midst of negotiating its reimbursement rates from the Ontario government and the outlook isn’t flattering. “Several indicators suggest that a new era of tighter reimbursement is already in place in the Ontario Clinical Labs market,” Mr. Gibbs noted. Slower reimbursement rate growth could mean lower margins on a contract that drives most of CML’s earnings before interest, taxes, depreciation and amortization. (A final decision is expected this fall.)
And those problems are set against a backdrop of poor U.S. performance, which some people have cited as the reason the executives left. As noted back in May, the U.S. business has been in trouble, and the most recent quarterly earnings prove things haven’t gotten any better. Last quarter was CML's fourth consecutive quarter of revenue declines south of the border, and there are fears that U.S. reimbursement rates could get cut even further.
CML’s margins have yet to fall drastically in the past 12 quarters, but Mr .Gibbs noted that they also haven’t increased, even though the company made a bunch of Canadian medical imaging acquisitions in 2008. Watch these figures if reimbursement fees grow at a slower pace, because there is only so much the company can cut to offset changes in revenue.