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Small Cap Discoveries New starter position VIEMED VMD-TSX V, $2.29
Nearly 3 years ago, Patient Home Monitoring (PHM.V) was the darling of the Canadian stock market. Its stock hit $1.91, giving investors nearly 700% returns from the year prior.
Best yet, PHM grew by acquisition spree -- acquiring 16 companies in an 18 month period. This gave the street lucrative banking fees to go along with those big returns. The name was everywhere -- even Paul got asked about it on his appearance on BNN back in September 2015.
Well today the stock sits at $.18, down 90% from the peak. That plus stock sales by insiders has put PHM on the street’s bad list. Now in an effort to turn things around and drive shareholder value, PHM is spinning out their crown jewel, Viemed (VMD.V).
A spin-out of a disliked company? It’s a value investor’s dream.
Spin-offs have long been a prime place to find value. They are complex (see PHM’s 1000 page document...). Institutional shareholders of the larger parent often can’t hold the spin-out. Indiscriminate selling abound.
Meanwhile, the spun-off company gets a fresh start. They are (often) freed of debt and corporate bureaucracy. An incentivized management team can do wonders with a more nimble, focused, spin-off. That’s what we see in Viemed. Now to the business.
Viemed Opportunity
Viemed came to trade on December 24th, 2017. Each shareholder of PHM received 1/10th of a share of VMD. Here are some quick facts:
Ticker: VMD, TSX-Venture
Marketcap: $100M CAD / $80M USD
Revenues: $12.5M USD last quarter, $50.0M annualized USD (they report in USD)
Net income: $4.0M last quarter
Shares outstanding: 37M
The business is simple enough. VMD provides non-invasive home treatment solutions for patients with respiratory diseases. Think Chronic Obstructive Pulmonary Disease (COPD) -- it’s an umbrella term that covers emphysema, chronic bronchitis, and asthma, among others.
VMD works with hospitals to transition patients out of hospitals and into home care. They offer a full suite of services -- therapy, counseling, and access to the latest equipment.
Treating patients at home is dramatically cheaper than in a medical facility. With an aging population and exploding health care costs, the US has been looking for anything that can contain healthcare costs.
With industry trends in their favor, and now a focused management team, VMD’s growth has exploded: |
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Those numbers alone were enough for us to buy a starter position. But after researching further, we like it even more. Here’s why:
Pros
- Growth. VMD increased revenues 57% last quarter. All organic -- with a positive outlook of trends continuing.
- High gross margins. We love high margin businesses, because they can grow earnings much faster than sales. VMD hits the mark here. Gross margins were 90% last quarter, up from 80% last year. Management has continued to drive increased margins through purchasing equipment vs leasing.
- Incentivized management. Casey Hoyt (CEO) and Michael Moore (President) each own about 15% of VMD. They are childhood friends who built a $40M business together at Sleep Management (predecessor to VMD). We think they will make for a strong team at VMD.
- Cheap. Marketcap is currently $80M USD / $100M CAD. Run-rate from last quarter is $50M revenue and $16M net income. Valuation is 1.7X sales and 4.4X earnings -- very cheap for a growth company. Now income is inflated -- we will have public company costs, bad debt expense (these change seasonally), and taxes. But even accounting for those, the stock could double and still look cheap.
- Strong balance sheet. Free from PHM, Viemed has $7.2M in cash and no long-term debt. This will give them flexibility to invest in the business. And give us downside protection should another Medicare rate cut happen.
- Clean share structure. VMD has 37M shares out, plus a small number of options and warrants. 30-40 million shares has been a magic number for us in stocks that have performed extremely well in a small amount of time.
No story is perfect. Here are two of the big risks we see with the business:
Cons
- Medical reimbursement rates. Over 65% of VMD’s business is from Medicare reimbursements, which are set annually by the US government. Changes in these rates can have a huge impact on VMD’s results. Just in 2016, the government lowered rates for VMD’s service by 30%. Revenues fell overnight.
- Collections. VMD’s model is to provide services up-front and collect payment later. Medicare debts are government backed and a sure thing. But all other billings can be contested. VMD’s bad debt expense can’t be viewed as a one-off -- it’s a cost of doing business.
In conclusion, Viemed checks all the boxes -- with the added kicker of being a spin-off from an out-of-favor company. If VMD’s growth continues, we think this stock will be impossible to ignore despite its past with PHM. We are long shares at $2.29 and looking to add more, price-dependent.
To your wealth,
Paul and Brandon
Disclosure: Paul and Brandon are long VMD.V |
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