PHM Gains on Report On Business Story

Out top spec pick ( picked at $1.11  ) gained Monday closing at $1.46 on a feature in the Globe and Mail Report On Business :

Being a top performer on the TSX Venture Exchange doesn’t exactly set the investing community abuzz these days.

One of the elite listings on the lowly Venture of late is Patient Home Monitoring Corp., which has unleashed a wave of acquisitions to bring about a quintupling in share price over the last year.

Now big enough to have overcome most of the startup risks associated with Venture names, but not so big that investor hype has priced in a growth premium on the stock, Patient Home Monitoring still has plenty of room to grow.

“Normally one hears of stocks that the ‘easy’ money has been made,” Beacon Securities analyst Doug Cooper said in a recent note. “However, we believe with PHM, the opposite is the reality.”

Underlying the company’s business model are some powerful trends in U.S. health care. An aging population, combined with capacity strains on health-care facilities, have ensured a high growth rate in the home-based health-care services market.

“In a period of uncertainty in the economy, we believe the U.S. health-care service industry, especially one catering to the aging baby boom generation, offers a relatively safe haven,” Mr. Cooper said.

Patient Home Monitoring focuses on three major categories of illness – diabetes, pulmonary and cardiac – to offer multiple services to the chronically ill.

While listed in Canada, the company targets the highly fragmented U.S. home monitoring market, acquiring smaller regional businesses that need capital to expand.

Investors tend to look upon roll-up strategies with some skepticism, in part because they end up relying exclusively on acquisitions for growth. Patient Home Monitoring, on the other hand, is able to combine acquisition-based growth with considerable organic growth.

It does so through its expanding patient database. While takeover targets ideally have strong revenues and earnings, and are available at favourable prices, an extensive client list is a top priority in hunting for new deals.

“Through mining the aggregate patient database, PHM will cross-sell its various services thus driving revenue-per-patient growth,” Mr. Cooper said. “For example, those with pulmonary issues have a high probability of a cardiac condition … [and] a high probability of being overweight/obese that could require a power mobility solution.”

In the fiscal first quarter, the company generated organic annualized revenue growth of 34 per cent year over year, Mr. Cooper calculated.

And the company’s growing acquisition pipeline should mean much more growth of both kinds. Having already closed two deals this year, Patient Home Monitoring has three pending acquisitions which will just about double the size of the company, generating annual sales of about $125-million by the summer. By the end of this year, the company is targeting $175-million in annual revenue. Sales in 2014 amounted to $21.2-million.

And previous company guidance has consistently proven conservative, said Bruce Campbell, president and portfolio manager at StoneCastle Investment Management Inc., which owns shares of the company. “They’ve been fairly cognizant of not trying to over promise.”

Michael Dalsin, the company’s CEO, has said he thinks $1-billion in revenue is a realistic mark for Patient Home Monitoring, eventually. That 10-figure top line mark might come into view much sooner than many expected, considering the company’s pace of acquisitions.

In the first two months of this year alone, Patient Home Monitoring issued letters of intent or term sheets to 12 companies with combined annual revenues of more than $141-million. Non-disclosure agreements – which are the first step in identifying targets – were signed with another 40.

That kind of growth makes the company’s valuation a moving target. “The real difficulty is trying to figure out what multiple you should put on these things,” Mr. Campbell said. He estimates the stock is trading at an enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of a little less than 10 times, based on future earnings the company has publicly declared.

Mr. Cooper said the company’s growth already realized and yet to come should warrant a multiple in the upper end of the range of 10- to 12-times forward EBITDA, which results in a target price of $1.75. Mr. Cooper is currently the only sell-side analyst covering the stock, according to Bloomberg.

While the stock has risen by more than 60 per cent this year so far, Patient Home Monitoring is now a safer play than it was a year ago, when investors had little proof that the company could execute its roll-out strategy and cross-sell its services, Mr. Cooper said. Plus, the company’s clean balance sheet increases flexibility and lowers risk.

“All of those fears should be dispelled now,” Mr. Cooper said.

Patient Home Monitoring (PHM)

Friday close: $1.39, up 4¢

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