AIQ - Alliance Healthcare

[GrizzlyRock]

The reason it did not sell was Oaktree at the time did not want to lose money on it and they saw a lot more value than the market was giving them credit for.  They purchased the equity from KKR about 7 or 8 years ago.  When you see transactions at 7x EBITDA and a weaker competitors (Radnet, Digirad and Fonar) selling for 8x EBITDA in the market are you going to sell for 5x EBITDA?  Oaktree is smarter than that.

 

Packer

 

Fair point.  I'm digging at why Alliance didn't trade for the aforementioned multiples in the private market?  To me the differential between the RadNet valuation and Alliance is striking yet perhaps RadNet is just overvalued?

 

PS: I'm really looking for dis-confirming evidence on potentials problems with the idea  Alliance's FCF models screams WAY cheap...

[Packer16]

I think part of the reason is liquidity.  Alliance has average trading volume of about 5% of Radnet but a market cap that is roughly comparable.  The lack of liquidity I think scares away many and prevents many institutions from buying.  There is also a discount for lack marketability applied to minority stakes in private businesses which may be at play here, for private companies it is typically 25 to 40%.  Given my expected holding period I am willing to bear the lack of marketability that others who are not.

 

Packer

[GrizzlyRock]

Thanks for your constructive comments Packer

[jeremykgold]

Radnet does not trade at too much higher a valuation based on FCFe yield.

[Packer16]

For leveraged firms like AIQ and RDNT, IMO you have to compare them on a EV metric like EV/EBITDA as FCF metrics can be misleading due to the debt.  RDNT has a higher debt level (4.5x vs. 3.4x EBITDA) and lower EBITDA coverage ratios (2.6 vs. 5.8) than AIQ and thus should trade a discount on a FCF multiple basis.  In addition, RDNT debt has a higher current yields in the market than AIQ's thus the FCF yield spread (FCF yield less debt yield) is higher for AIQ vs. Radnet indicating a lower valuation.

 

Packer

[Laxputs]

I'm thinking of adding here. Anyone have anything specific to AIQ about the recent ~30% decline?

 

It just seems too easy:

 

6.5x multiple on 142mm 2015 EBITDA no growth scenario.

 

923 EV

-505 debt

- 45.3 MI

+ 39m cash + ~40m cash from 2015

-------

462m M-cap

 

Current M-Cap 209m

 

IRR from today until 2015 results released Feb 2016 is 97%.

 

Mgmt expects 2015 to have growth. Hospitals looking to replace/upgrade equipment. Population aging. Strong management. What am I missing?

[tombgrt]

Maybe they negotiated to be paid in rubles and barrels of oil for most of their contracts...

[gary17]

Relax guys

I think there's some tax selling going on plus traders. 

I remember this happening 12months ago too

[tombgrt]

Nah, I think I should continue bitching on the stock movement given my track record (see post 176 in this thread). If only my timing in buying was as impressive... ;) 

 

Another lesson learned in accepting that stocks often go to extremes you don't expect to happen. Remedy is simply not buying as much to start with, especially if you run a very concentrated portfolio like myself. Awch!

[investor-man]

Nah, I think I should continue bitching on the stock movement given my track record (see post 176 in this thread). If only my timing in buying was as impressive... ;) 

 

Another lesson learned in accepting that stocks often go to extremes you don't expect to happen. Remedy is simply not buying as much to start with, especially if you run a very concentrated portfolio like myself. Awch!

+1 keep bitching

[kab60]

Nah, I think I should continue bitching on the stock movement given my track record (see post 176 in this thread). If only my timing in buying was as impressive... ;) 

 

Another lesson learned in accepting that stocks often go to extremes you don't expect to happen. Remedy is simply not buying as much to start with, especially if you run a very concentrated portfolio like myself. Awch!

+1 keep bitching

I second that!

[LC]

In terms of buying/sizing: yeah you may have bought too much too early but that is with the benefit of hindsight and you never know what will happen with the stock price.

 

This is a talked about topic, but just me personally...I have started to refine how to size and how to trade around positions. I think Eric said something in one of the BAC threads which made sense. To summarize, if you have a really concentrated portfolio, trading around positions can be very beneficial.

 

in AIQ's case yesterday I bought under $20/sh and will look to sell those shares in the mid-low $20s. So I'll be underwater still (average purchase price is ~25/sh) but less so.

 

Someone else once said somewhere on this board (and I think it only really applies to concentrated portfolios), "split each position into thirds: your first buy of 1/3 is your investment, your second buy of 1/3 is when you average down (my note: or up!), and the last 1/3 is a trading position."

 

So I originally bought at higher prices than today (like $27-29/sh), averaged down at around $23/share, and now have a trading position as well.

 

Also you need a general idea how much of a max dollar amount you want to put into the idea. For me, this number is a back-of-the-envelope range based on how undervalued the current idea is when compared to the rest of the portfolio. (Side note: the same logic applies to how I determine how much cash to hold: how much is my portfolio undervalued compared to the market, taking into account the general level of market over- or under-valuation)

 

It also was the same case in BAC. I bought originally at maybe $7-9/share, then averaged up when the stock was ~11/share, then bought a trading position at $14/share. The trading position was sold around $17.50 or so a while back while I still hold the first two blocks. (Also the first two buys were call options/warrants but I am quoting the stock price to make it easier to follow the progression).

 

Also I think a key is that you have to be convinced of value. If AIQ shares quote lower than $19, I would otherwise be really pissed because my "trading position" essentially became another "averaging down" position. So I have to be convinced there is value to be comfortable averaging down once, and potentially twice.

[tombgrt]

Good post LC, I agree. In this case however I was lured in too soon as I quickly bought a first 'trading position' at $24-25 after already having bought a big stake at $27-29. What I should do is realize that stocks can drop further and not be too eager to buy after only a small drop, especially when it already is a big position and when I few the overallocation as a "temporary portfolio situation". It's simply a bad habit for me personally.

 

The problem isn't conviction but the lack of options when more than one of my big positions turn against me, which happened in this case. You can only - very very - rarely make a big position (in my case 25%+) even bigger. I know I would be perfectly comfortable going 50%(+) into one stock but that doesn't mean it's intelligent allocation of my capital. It would just mean I have big balls and that I'm hoping I'm getting compensated for the risk I'm taking. Not a winning formula in the (very) long run.

[hyten1]

LC,

 

good post, i would add, tax implication make this a little bit harder to implement (I hate paying 40% tax on short term gains)

 

also I would add using option is a good alternative for trading part of the 1/3

 

hy

 

In terms of buying/sizing: yeah you may have bought too much too early but that is with the benefit of hindsight and you never know what will happen with the stock price.

 

This is a talked about topic, but just me personally...I have started to refine how to size and how to trade around positions. I think Eric said something in one of the BAC threads which made sense. To summarize, if you have a really concentrated portfolio, trading around positions can be very beneficial.

 

in AIQ's case yesterday I bought under $20/sh and will look to sell those shares in the mid-low $20s. So I'll be underwater still (average purchase price is ~25/sh) but less so.

 

Someone else once said somewhere on this board (and I think it only really applies to concentrated portfolios), "split each position into thirds: your first buy of 1/3 is your investment, your second buy of 1/3 is when you average down (my note: or up!), and the last 1/3 is a trading position."

 

So I originally bought at higher prices than today (like $27-29/sh), averaged down at around $23/share, and now have a trading position as well.

 

Also you need a general idea how much of a max dollar amount you want to put into the idea. For me, this number is a back-of-the-envelope range based on how undervalued the current idea is when compared to the rest of the portfolio. (Side note: the same logic applies to how I determine how much cash to hold: how much is my portfolio undervalued compared to the market, taking into account the general level of market over- or under-valuation)

 

It also was the same case in BAC. I bought originally at maybe $7-9/share, then averaged up when the stock was ~11/share, then bought a trading position at $14/share. The trading position was sold around $17.50 or so a while back while I still hold the first two blocks. (Also the first two buys were call options/warrants but I am quoting the stock price to make it easier to follow the progression).

 

Also I think a key is that you have to be convinced of value. If AIQ shares quote lower than $19, I would otherwise be really pissed because my "trading position" essentially became another "averaging down" position. So I have to be convinced there is value to be comfortable averaging down once, and potentially twice.

[LC]

I did the same thing when Weighwatchers dropped down to ~19/share. It first dropped into the mid-low 20s, but you like you say, you have to realize it can drop further. So in my true paranoid fashion I just waited. I think when you're buying a position to trade back up on the way towards fair value, it usually pays to wait until it hits the "stupid cheap" variety. For AIQ I don't think it was "stupid cheap" at 24-25 but you may differ! That said the emotional bumps along the way can be difficult! I made a fun picture from my WTW trading pattern to illustrate:

 

 

hy, you're right, tax implications take a lot of the joy out of it. thanks for the tip on options, that is a wise move I agree :)

[investor-man]

This is getting a bit too off topic, but I'll continue the discussion - I like LC's idea but it's not for me. having a trading position would be too emotional for me. I feel a tremendous amount of guilt if I sell something before it hits my target price. Different strokes for different folks I guess

[plato1976]

The year end pull back can be explained by the year end tax loss selling, and then this one is pulling back again with other stocks now. This is a little bit unreasonable b/c the bad macro environment outside of the U.S. will actually keep rate down, which is good for AIQ. AIQ 's business is not sensitive to econ cycles and it doesn't have oversea business as far as I know

In my opinion this is a good entry. I just hope AIQ can control its CAPEX and use cash to reduce debts and then buy back shares/issue div

 

Relax guys

I think there's some tax selling going on plus traders. 

I remember this happening 12months ago too

[KJP]

Is anyone concerned about the age of AIQ's machines?  The company's net PPE has fallen dramatically over the last five years, apparently because they have been trying to extend the life of existing machines, rather than buying new ones.  Indeed, part of the reason depreciation expense has been falling over the last few years is that they are running machines that have already been fully depreciated (of course, part of the decline also has to do with owning fewer machines).  Management suggests this is not a problem because the life of the machines can be extended through (relatively cheap) software upgrades.  But how long can that last?  I assume the machines are going to have to be replaced. 

 

This point also makes me question the utility of pure EBITDA multiple comparisons.  Today, 100 machines that are 10 years old might generate essentially the same EBITDA as 100 brand new machines.  But you wouldn't pay the same for the 10-year old machines as you would for the new machines, would you? 

. 

[Packer16]

I am not as last year they went through their mobile imaging fleet and sold the older and less efficient machines that were not being fully utilized and their fixed machines are on longer term contracts (10 years) and are integrated into medical centers work flows.

 

Packer

[Olmsted]

Yes this is something I too am working my head around.  I see the negative book value, I see the 600m+ accumulated depreciation, and we have 800m+ of medical equipment at cost. 

 

I presume that their depreciation schedule is aggressive and does not accurately reflect the need to replace machines.  This seems to be the case - I see depreciation consistently running higher than "new equipment purchases."   

 

My only concern here though is that as new equipment purchases are put off - there is a "wave" of Capex requirement coming at some point in the future, which should correctly be thought of as a liability.  Thoughts?

[prevalou]

Ezekiel Emanuel in his book "reiventing Healthcare" thinks actual prices paid by insurers for imaging tests will drop 25 % to 50 % by 2020 (more transparancy and bundled payments, capitation)

[Packer16]

My understanding is in the legacy mobile business demand is declining so they are optimizing and rationalizing the FA they have to service this business.  The new business is based upon LT commitments from health care providers.  So I see little obsolescence risk here as the new equipment for new projects is priced in the context of the health care providers commitment.

 

Packer

[Olmsted]

Ah, I see.  Thank you for the context - much obliged.

[simplefocus]

Hi Packer,

 

I just started looking at AIQ and noticed that you initiated your position in AIQ in 2012.  Do you still have a big position in AIQ?  Are you still confident about this investment?  If AIQ is at 7x EBITDA, it's at least a $40+ per share.  Is this a fair valuation?  Does it bother you this is a thinly traded stock?  Is this the reason why the valuation is so low?  Sorry for asking so many questions.

 

Thanks.

[Packer16]

Yes I do still have a large position about 8% at this point.  At 7x EBITDA I get closer to $49 per share which I think is close to fair value.  RDNT sells at a premium to this price and most medical facilities trade at 7 to 9x EBITDA. 

 

As to thin trading that goes with the territory of cheap stocks and that may be one reason it trades at a discount to RDNT.

 

Packer