Monday, March 19, 2018

Viemed

Viemed Healthcare (VMD) provides home respiratory services to those who need breathing assistance. As an investment, I believe it has a lot going for it, and so I bought shares in early February.

First of all, it's a spin-off, and from a cash-burning company at that. These can be good, as shareholders of the parent may indiscriminately sell off this new company in their portfolios, in order to get what they can.

Management of the parent moved to become management of the profitable spin-off, suggesting they have more confidence in this business than the parent. These guys are also big shareholders, owning about 30% of the new company.

But it's not like management is unfamiliar with the business, either. They became managers of the parent when the parent acquired this business several years ago. Now that it's being spun back out, it only makes sense that management resume their previous roles.

Viemed's market cap is in Canadian dollars, and their financials are in USD. The company trades for CAD 120 million and earned about USD 8 million in 2017. After normalizing for currency, this is a ttm P/E of around 11 despite this being a spin-off year where a bunch of extra costs were incurred.

But what's really exciting is the growth profile. Management sees a ton of organic growth ahead of it, as demographics (aging boomers) and the business' economics (vs hospital visits, patients with in-home respiratory services live longer and are cheaper for health insurance providers, resulting in a win-win that should see penetration rates increase dramatically in the coming years) provide tailwinds. Revenue grew almost 50% in 2017 vs 2016.

As the company grows, it needs to plow its earnings right back into more respiratory equipment for its patients, so shareholders shouldn't expect anything anytime soon. But that's okay, as the company's ROE is very high, so it looks like money well-spent. If/when the growth rate falls to zero, the company's capex should also, as new patients can be provided with equipment from expiring ones.

One risk is that Medicare provides a majority of the revenue. This means one body is deciding on rates, and for that matter, whether to cover this service at all, that can have a huge effect on Viemed. Medicare has indeed cut its rates for this service in the past. Management is mitigating this risk by, of course, lobbying by demonstrating the effectiveness of this treatment over others, but also by demonstrating its financial effectiveness to private insurers so that it can grow/diversify its revenue further.

Overall, I think this is a well-run business with good growth prospects with a management with a strong track record within this industry already. As a result, I like the stock at what looks to me like an attractive valuation.

Disclosure: Author has a long position in VMD

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