GEO Investing

PFHO stock is down sharply, but off its lows…The GeoTeam has added shares.

The GeoTeam has added shares of PFHO. We believe Pacific Healthcare Organization sold off after the open today due to some commentary made in its 10-Q regarding a customer of theirs being acquired, and then potentially taking “in house” all of the business that they currently perform with PFHO. This customer had accounted for 14% of total revenue in the past nine months. PFHO’s revenue was again up significantly this past quarter. This is the statement from the company’s 10-Q:

“During October 2014 the Company was notified by Companion Property & Casualty Insurance Company, who is a significant customer, that subject to certain closing conditions including necessary governmental and regulatory approvals, it will be acquired by Enstar Group Limited (“Enstar”).  Upon completion of the acquisition, it is anticipated that Enstar will take in-house all of the business Companion currently outsources to Medex.  If the transaction closes and Companion terminates Medex’s services, the Company anticipates MBR fees and total revenues could be impacted beginning with the first fiscal quarter 2015.  The loss of this customer could also impact the Company’s profitability and liquidity until such time as the Company is able to replace the revenue generated from this customer.  During the nine-month period ended September 30, 2014 MBR fees generated from this customer represented approximately 67% of total MBR fees and 14% of total revenue.  During the nine month period ended September 30, 2013 MBR fees generated from this customer represented approximately 58% of total MBR fees and 14% of total revenue.”

Despite this, PFHO posted a record number of enrollees again. From the following statements, we conclude that PFHO is actually growing, despite losing this one customer.

  1. We currently have planned certain capital expenditures during the remainder of fiscal 2014 to accommodate our growth.  We do not anticipate this will require us to seek outside sources of funding.  We do, however, from time to time, investigate potential opportunities to expand our business either through the creation of new business lines or the acquisition of existing businesses.
  2. Based on recent statutory changes made by the Division of Workers’ Compensation, the Company has reinstated its lien representation services through Medex Legal Services during the fourth quarter of 2014.  There are two reasons for the Company’s decision: 1) Lien activation fees have been declared unconstitutional by California courts, so the number of significant lien filings is again increasing; 2) and in November the Company was engaged by a public sector employer to handle its lien representation services.

We believe the public sector employer could be a government entity in California. With the additional customers we believe the company is taking on, combined with some reports of the company hiring, combined with the statement about growth in the 10-Q – we believe PFHO is  still poised to continue into 2015 with quarter over quarter of continued record growth. The company posted revenue up 62% to $2.75 million and net income up 64% to $0.69 (fully diluted). Both numbers are up sequentially (about 20% and 10% respectively), as well.

We created some proformas this morning to try and gauge a worst case scenario for PFHO in response to this news. Our “worst case” scenario would still result in growth for the company with a $1.49 EPS for the prior nine months (versus the $1.87 the company has posted this year). Assuming a 23x multiple (which is what competitor CorVel [CRVL] trades around) on a $2.00 EPS, we get a share price of $46 – about 10% higher than where the company is currently trading.

However, PFHO is currently growing at a much quicker rate than CorVel.

If you believe PFHO is going to continue it’s growth into next year, as we do, we can easily envision a multiple of 23x on EPS between $2.50-$3.00 for the coming year, resulting in a stock price between $57.50 and $69. Long term, we believe the company could have potential well beyond next year.