PRSC - Providence Service Corp.

[ValueSlant]

From intro to my recent write up:

Providence Service Corporation (PRSC) is a quality business whose stock is being depressed by misplaced headline risk relating to strained state government budgets and Medicaid reimbursement. The reality is that in a tight money environment PRSC can gain market share because they provide federally mandated services with low cost delivery models, and their strategy of handling government contracts with sustainable margins will enable them to maintain profitability. One can acquire this business with recurring revenue, minimal capex requirements, and strong free cash flow at 4.3X EBITDA and 8.5X earnings, and it is even cheaper in light of locked in contracts that will boost revenue going forward. I think the stock has 100% upside potential in the next 18 months based on a conservative earnings scenario, and substantial growth opportunities could provide even greater returns.

 

Full write up is here:

http://valueslant.com/2011/07/11/providence-service-prsc-look-past-headlines-find-value/

 

Would be very interested in any feedback.

 

[Shane]

Value-Slant -

 

I'm not surprised by the lack of responses because of the length and complexity of your analysis.  I read through your work and unfortunately don't have the background to be comfortable with commenting.  I'd like to say that I think your analysis seems very thorough and I wish the you best of luck.  I typically try to stay away from regulated industries because of the obvious issues, as you say in your analysis this appears to be the reason for the discount.  Anyways I've added your blog to the list I keep up with because It is clear to me that you are capable of putting together great work!

[claphands22]

ValueSlant,

 

Thanks for the idea and the blog. I now have you on my RSS feed.

 

[Guest Hester]

This is kind of outside my circle of competence, so I don't have anything to add, but I thought the writeup was excellent. Very good level of analysis. I'm not surprised by the lack of responses, non tech/insurance/commodity/controversial stocks have trouble gaining traction on this board it seems.

[mvalue]

This is a nice writeup. I have followed this and own it. The huge risk here is management seems open to doing stupid things with capital, and my sense is they really don't have any intent at all to pursue a stock buyback. They want their cash line-item, yet are happy to pile up debt for an acquisition (again). I do think the low-margin/high ROC business is interesting in that it's not appealing to entrants and management seems to execute well operationally fairly consistently.

[ValueSlant]

I agree Mvalue I don't know why management is pressing for an acquisition with the stock so depressed. There does seem to be an attitude of empire building on the part of management that hasn't hurt them that badly yet (if you want to let them off the hook for doing a huge acquisition and levering up right before the recession hit), but could going forward. Part of that seems to be that management thinks they have to keep growing the top line 20% a year for the stock to move. But it seems like a buy back or a substantial pay down of the debt would work just as well in the near term. The saving grace might be that so far they seem to be leaning towards a small acquisition.

 

Also I have to think at these levels they have gotten some PE interest given what has gone on with some of their competitors, but I don't think management has seriously considered that either. All in all not an ideal alignment of interests with shareholders.