Investors seeking an alternative play in the hot health-care sector are checking up on CRH Medical Corp., a U.S.-focused medical services company with ambitious growth plans.
Shares of the Vancouver-based company have doubled so far this year after CRH moved from being a single-product company offering services for doctors treating gastrointestinal diseases, to one that also offers anesthesiology for patients undergoing endoscopies and colonoscopies.
In December, CRH paid $73.2-million (U.S.) for Gastroenterology Anesthesia Associates (GAA), based in Lawrenceville, Ga., one of the largest providers of anesthesiology services to gastroenterologists in the southeastern United States. Since then, CRH has made two much smaller acquisitions in the same region, and is on the hunt for more deals across the United States.
CRH chief executive officer Edward Wright told analysts recently that he would be "disappointed" if the company didn't do one or two more deals by the end of the year.
"If they execute on acquisitions, which we think they should be able to do, there's more upside to the stock," said Bloom Burton & Co. Ltd. analyst David Martin, who has a "buy" recommendation and a $5.70 (Canadian) target on the stock, which he said doesn't price in the potential for future acquisitions.
All five analysts who cover CRH have a "buy" on the stock, with a consensus 12-month target price of $5.96, according to Bloomberg. That's about 20 per cent above where the stock is currently trading around $5.05.
CRH shares are up more than 500 per cent over the past year, although analysts note it was a different company before it got into anesthetic services in December, 2014. Today, about 80 per cent of its revenue is from anesthesia services, while the rest is from its legacy business, what's known as the CRH O'Regan System, a banding technology that removes hemorrhoids.
Jason Donville, president at Donville Kent Asset Management, started buying the stock after the GAA deal, around $1.50, and has been accumulating shares since, at an average cost of about $2.55. He likes the larger story of the company catering to the health needs of an aging population.
"There's also no economic sensitivity," Mr. Donville said. "Whether the economy goes up or down, people are still going to get a colonoscopy."
Mr. Donville also likes the "roll up model," when the company buys growth through acquisitions, and at a pace that is in the "nice comfortable medium range."
Bruce Campbell, president and portfolio manager at StoneCastle Investment Management, has also been actively buying CRH stock since the company got into the anesthesiology space late last year, and trimming his position at times to balance out his portfolio. He bought CRH stock again last week when the stock fell back below $5.
"As long as the numbers hold up we're happy to hold it," Mr. Campbell said, referring to CRH's second-quarter results that were in line with most analysts' expectations, as well as the company's promise of more acquisitions.
Mr. Wright, who has been CEO at CRH since 2006, said future deals aren't expected to be as large as the GAA deal (which included $58.6-million [U.S.] at closing and up to an additional $14.6-million payable within 4.5 years based on agreed financial performance) but will be focused on the same anesthesiology services across the United States.
"This is a fragmented space where we have good relationships," Mr. Wright said. "We are looking forward to significant growth in that sector."
He said the company is also looking at a potential U.S. listing, but isn't considering a dividend any time soon, preferring instead to pour money back into expanding the business.
Beacon Securities analyst Doug Cooper, who has a $6 (Canadian) target price on the stock, said a possible U.S. listing would be a positive catalyst for the stock, but "the most significant would be an acquisition of additional anesthesia procedures, which we expect before year-end."