US Physical Therapy Stays On Its Margin Hot Streak

Margins matter. The more US Physical Therapy (NYSE: USPH  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong US Physical Therapy's competitive position could be.

Here's the current margin snapshot for US Physical Therapy over the trailing 12 months: Gross margin is 27.3%, while operating margin is 15.1% and net margin is 8.8%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where US Physical Therapy has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for US Physical Therapy over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 28.1% and averaged 26.9%. Operating margin peaked at 15.8% and averaged 14.2%. Net margin peaked at 8.8% and averaged 6.6%.
  • TTM gross margin is 27.3%, 40 basis points better than the five-year average. TTM operating margin is 15.1%, 90 basis points better than the five-year average. TTM net margin is 8.8%, 220 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, US Physical Therapy looks like it is doing fine.

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Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On February 07, 2013, at 12:00 PM, jsn1080 wrote:

    It's good to look back at a company's financial record. However, there is no mention of any catalyst for growth or perhahps lack thereof. Also, no mention of the fact that USPH recently announced that the American Taxpayer Relief Act of 2012 signed into law includes provisions which will reduce reimbursement for physical therapy services provided to Medicare patients.

    "In 2012, Medicare patients accounted for approximately 23% of U.S. Physical Therapy’s total physical therapy patient revenue. The Company’s management estimates that the impact to the Company’s average net reimbursement for Medicare patients will range from approximately $8.00 to $10.00 per Medicare patient visit. The effect to the Company’s overall average net rate per visit, including all Medicare and non Medicare patients, is estimated to be a $1.84 to $2.30 per visit reduction. U.S. Physical Therapy reported an overall average net rate per visit, including Medicare and non Medicare patients, of $105.31 for the first nine months of 2012. The estimated net income impact to the Company from the rate reduction is $1.6 million to $2.1 million or $.13 to $.18 in diluted earnings per share in 2013."

    I am willing to bet this will result in a temporary hit to earnings, which will recover significantly based on the volume of patients the centers will treat once Obamacare fully kicks in and state opt in to expand their medicaid services. In short, margins may contract a little, however, I think EPS will continue to grow.

    I am keeping a close on this stock and if it drops below $24, I will likely take a position. I like that fact that the company has consistently had FCF/Revenue of > 10%.

    http://finance.yahoo.com/news/medicare-reimbursement-reducti...

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