PM.v - Prism Medical

[bz1516]

Prism Medical - a mispriced situation with growth and income

 

Prism Medical produces and markets durable medical equipment products & services to the mobility disadvantaged in Canada and the US. Its primary products, fixed & portable ceiling lifts and mobile floor lifts are sold to the hospital, nursing home and home healthcare markets.

 

The company was restructured in the last fiscal year ending Nov 30. They sold their UK subsidiary netting $51mm with an after tax profit of $24mm. To put this in perspective, the market cap of the company is now $48mm.

 

The major use of the funds was for a share buy-back. Shares decreased from 8,400,000 to 4,800,000. The rest of the funds were used to clean up the balance sheet and put the company in position to grow its US market segment. The plan is to grow the US market both organically and by acquisition in its primary product lines as well as its secondary products including stair lifts, increasing its vertical integration as opportunities arise.

 

Sales for the year ending Nov 30 were $44mm of which 68% were in the US. Gross margins increased to 46% in Q4 vs 38% in the prior year. The company has researched and determined that whatever changes take place in US healthcare policy their products will continue to enjoy a positive market environment. Since 2011 Canadian sales have essentially been flat while US sales have grown considerably since 2012, from $17mm to $29mm.

 

The opportunity here is the market does not appear to appreciate the change in direction the company has made this past year, both from a marketing standpoint as well as financially. The recently released Q4 and annual financial results as shown in the press release look like a lot of red ink across the board from operating income to net income to eps, both for the quarter and for the year. Looking a little deeper indicates the company’s results are not only a lot better, but show it has already turned the corner. None of this would be apparent from reading the press release. The full picture emerges only from reading the full financial statement and MD&A and retracing the sale of the UK subsidiary and the stock buyback.

 

When the one-time restructuring charges are taken out of the 2014 income statement and the large jump in income taxes normalized, the company appears to be quite profitable with an upward trajectory and in fact has a PE ratio of ~10x, LQA. The stock pays a dividend and has a 5.0% yield, however the POR is only 40% based on expected 2015 full year adjusted eps. Management gave their most positive outlook this quarter, restating their optimism that their plan for the company is proceeding, with opportunities for further organic and external growth.

 

The shares are currently mispriced in my opinion. The mispricing is amplified by the fact management appears to communicate with its holders and the financial community only through its SEDAR filings and press releases. In such a situation there is going to be a lack of professional investors following the stock, both on the buy and sell sides. While not the most desirable situation, it does explain the lack of understanding of the current quarter’s results by mostly retail investors. The written disclosure provides enough performance and background for my comfort level. For me this is an opportunity.

 

Management expects margins to continue to improve. The recent financial statements support that position. In addition to higher margins the recent moderate size acquisition in January is expected to be accretive to earnings for this year which ends in November. With improving margins and the accretive acquisition I expect eps to be $1.25 or 8x eps for fiscal 2015 ending in November. As the earnings already recorded in Q4 become more visible to everyone I expect the shares to advance at least 50% over coming quarters. As growth progresses over the next couple years my goal is for the shares to advance significantly further. Based on management’s track record as a capital optimizer I expect additional growth opportunities to develop along the way.

 

 

Q4 results: http://web.tmxmoney.com/article.php?newsid=74334319&qm_symbol=PM

 

Q4 financial statement: http://www.prismmedicalltd.com/cmss_files/attachmentlibrary/F2014-Consolidated-Annual-Financial-S

tatements-Final.pdf

 

Q4 MD&A: http://www.prismmedicalltd.com/cmss_files/attachmentlibrary/PML_MDA_2014_Q4_Novem

ber-30_2014-Final-March-24-2015.pdf

[netnet]

As growth progresses over the next couple years my goal is for the shares to advance significantly further. Based on management’s track record as a capital optimizer I expect additional growth opportunities to develop along the way.

 

I have not looked at this company closely.  Do you know what changed, so that they restructured the balance sheet and are now capital optimizer, as opposed to previously being lackadaisical?  It appears that the management has not changed.

 

 

[bz1516]

As growth progresses over the next couple years my goal is for the shares to advance significantly further. Based on management’s track record as a capital optimizer I expect additional growth opportunities to develop along the way.

 

I have not looked at this company at all.  Do you know what changed (the management? new generation?) so that they restructured the balance sheet and are now capital optimizer, as opposed to previously being lackadaisical?

 

Thanks

The founder and driving force is still with the company.  However it looks like the number two guy left to go with the largest sub that was sold.

 

The restructuring was more a function of them having a lot of cash after the sale in relation to the assets and market cap of the business, so they had to do something with it or just let it sit in the alternative.  i think its fair to say that the restructuring was more a function of them already being a good capital optimizer rather than something new.  I think the opportunity for growth in the US was an impetus for the sale so in that sense it was a reason for the reorganization that followed from the sale of the sub.

 

 

[netnet]

When the one-time restructuring charges are taken out of the 2014 income statement and the large jump in income taxes normalized, the company appears to be quite profitable with an upward trajectory and in fact has a PE ratio of ~10x, LQA

 

I don't get the numbers you have for company.  Their GA went up.  They are sort of okay if you add back the DA of the EBITDA, but why would you in a company like this.  To have a PE of 10, they would have to have an income of 5 million which I don't see either. On faith, I would take them at their word on the non-recurring charge of ~ 1 million.

[Laxputs]

Nice write up. Thanks for sharing it.

[bz1516]

Nice write up. Thanks for sharing it.

 

Its true that G&A went up more than I like to see.  However net income showed a very nice increase anyway.

 

The only way you can get close to seeing a normalized run rate is to take the Q4 numbers and work with them.  Restructuring costs in Q4 were almost $1.4mm.  Adding back restructuring costs and taxes will show a very nice increase over the previous Q4 for EBT even with the increased G&A. 

 

Subtracting out taxes indicates a normalized net income for Q4 of ~$1.4mm.  Annualizing that and adding in the accretion from the acquisition indicates a net income for 2015 of almost $5.5mm without any organic growth.  Organic growth should get them to $6mm.

 

 

[Saj]

Nice idea, thanks.

 

Be careful annualizing the 4th quarter though:

 

"The fourth quarter tends to have the highest sales due to purchases in November ahead

of the December holiday period and also due to the October 31 fiscal year end for the US government. "

 

With no effect from the UK anymore, maybe this seasonality effect is even more pronounced now.

[netnet]

Thanks for the write-up and the idea by the way.

 

Buffett says shoot fish in a drained barrel, so I will wait for the Q1 numbers to see what is going on.

 

Best

[bz1516]

Thanks for the write-up and the idea by the way.

 

Buffett says shoot fish in a drained barrel, so I will wait for the Q1 numbers to see what is going on.

 

Best

 

Hey netnet.  I did just what WB said.  i waited for the Q4 numbers which came out last weekbefore being satisfied enough to take my position and write it up, but i respect that you want to do the same starting from now.

 

One more thought.  Before putting the cash from the sale to work, I'll bet this was not that far from being a net net. :)

[bz1516]

 

"The fourth quarter tends to have the highest sales due to purchases in November ahead

of the December holiday period and also due to the October 31 fiscal year end for the US government. "

 

With no effect from the UK anymore, maybe this seasonality effect is even more pronounced now.

 

They made that statement in the prior year's MDA, but left it out this year and went with  a very positive outlook for 2015 as a whole.  In addition Q1 2013 sequentially from Q4 showed a very nice increase.  However Q1 2014 was consistent with the quoted comment.  So i think that statement is probably counterbalanced to a good extent by the tone of this year's mda.  Still its probably worth shaving off a couple of pennies from the estimate.  Thanks for bringing it up.

[bz1516]

Prism Medical has an outstanding quarter extending the theme from Q4 of rapid growth in the US market, continued significant increase in quarterly earnings, and management showing conviction their plan to grow the business is working to their satisfaction, by declaring a special dividend this quarter of $1/share payable to holders in two weeks. The $1 special dividend is over 9% by itself.

 

Its hard to articulate the reasons for growth in the future, other than they've had large growth in prior quarters in the US and they anticipate continuing the trend and of course the numbers for the last several years in the US have been very strong.  The Outlook in the MDA link below explains it the best.

 

http://www.sedar.com/GetFile.do?lang=EN&docClass=7&issuerNo=00009348&fileName=/csfsprod/data151/filin

gs/02340824/00000001/C%3ASEDARFILINGSPrismMedicalLtdQ1MDA.pdf

[bz1516]

 

PM.v - Prism Medical Top Pick on BNN --

 

http://www.bnn.ca/News/2015/6/18/Top-Picks-from-Stephen-Takacsy-Savaria-Prism-Medical-and-Ag-Growth.a

spx

 

Spoke to the CEO Thursday as well. Here is a little more color on the investment thesis for Prism.

 

The company sold its UK operation for a combination of reasons - most of the hospital beds in the UK that could use ceiling lifts, the company's main product, already had them, about 80%. At the same time the market was very competitive and as it turned out the UK did not serve as a base for expanding into the rest of Europe.

 

Canada's 100,000 hospital beds were also saturated to about the same extent as the UK. However of the ~1,000,000 hospital beds in the US only about 10% currently have ceiling lifts. So it made sense not only to sell the UK, but to redeploy capital to the US a much larger market, but one very under penetrated as well. The premise that the US offers significant growth is supported by the rapid growth the company has enjoyed in the US in the last several years.

 

Adjusting for the amount of the recently paid special $1.00 dividend the shares have advanced very little since I first recommended them. They still look very attractive here.

 

[farbelow]

Thnx for the interesting idea. I wanted to look at their investor presentation, but it has been taken away (http://www.prismmedicalltd.com/investor-presentation.html). Does anybody happen to have that?