March 08, 1996
Prime Medical Services (NASD:PMSI)
Address : Austin, TX
Phone : 512-328-2892
Closing Price, March 7, 1996: $10
Trade: Buy 400 shares, March 8, 1996
THE COMPANY
By far the biggest success story in the Boring Portfolio to date is our Dallas-based cement and aggregates titan, Texas Industries. Consequently, I thought it fitting that the newest addition to the Borefolio should be another rock-buster out of the Lone Star State: Prime Medical Services, Inc.
PMSI's business is lithotripsy, a relatively recent treatment for kidney stones. Prior to the development of the procedure in 1984, the only way to provide relief for patients with painful kidney stones too large to eliminate naturally was to go in surgically and remove the stones. Lithotripsy is an effective, noninvasive procedure in which carefully focused shock waves are used to break up large kidney stones into fragments small enough to be eliminated in the patient's normal urine flow. Approximately 200,000 lithotripsy treatments are performed annually in the US.
PMSI went public in 1983 with the intention of developing cardiac rehab centers--without much success. The company then moved into managing radiology facilities: strike two. In 1989, American Physicians Services Group took control of the company by acquiring a 42% stake. The next couple of years were devoted to identifying new business opportunities and shedding the existing unprofitable operations. In April 1992, PMSI acquired the license to operate the stationary lithotripter owned by the Alabama Renal Stone Institute, in Birmingham. As Monty Python would say: That, for the Piranha Brothers--I mean Prime Medical--was the turning point.
The following year, the company bought four more lithotripters in the Southeastern US, a region which is to kidney stones as Waikiki is to sunburn. Last October, PMSI acquired eight more stone busters from California-based Sun Medical. Thus in a few years PMSI has gone from basically zilch to becoming the third largest lithotripsy outfit in the US, operating four stationary lithotripters and 19 mobile units. The latter are truck-based facilities that are deployed to hospitals as needed.
The company currently has contracts with 160 hospitals and 75 managed care providers in 22 states. PMSI's strategy is to acquire an additional 6 to 10 lithotripters annually, with the goal of establishing itself as the premier national network. Lithotripsy is a consolidating industry. MF Uptrend tells me there are approximately 350 lithotripsy units nationwide, with 250 of them in "mom and pop" hands--i.e., single units owned and operated by clinics or hospitals. PMSI's principal competition is Coram Healthcare, which operates 30 lithotripters but is limping along with various legal and financial problems.
PMSI reported fourth quarter and FY 1995 operations on Feb. 28. For 4Q '95, revenues increased 43%, to $7,632 million, with EPS up 86%, to $0.13 (beating consensus expectations by a penny). For the year, EPS grew at 48%, to $0.46 versus last year's $0.31. Gross margins for FY95 were 27%, as compared with 18% the year before.
Debt is a manageable 18% of market cap, but the company will need money for further acquisitions. This means either more leverage or more equity offerings. The company believes it has enough cash available through it's lines of credit (recently increased to $25 million), although a secondary equity offering is not out of the question. Analysts believe the company's cash generation (est 1996: $11 million) is sufficient to handle increased debt.
Of course, a major consideration for any medical company is the impact of current trends toward managed care and cost containment. Fortunately, lithotripsy is a cost-effective alternative treatment for kidney stones, and PMSI's strategy would seem to fit well with the trend for hospitals to minimize their own capital expenditures.
THE STOCK
Earnings projections for 1996 and beyond are complicated by the fact that carry-over tax advantages, from losses incurred during the company's previous incarnation, will phase out. First Call lists $0.67 as a target EPS for 1996, but a penny less than that for 1997 (due to the tax bite). On a fully taxed basis, however, comparisons are more favorable: $0.28 for FY95, $.40 for FY96, and $.66 for FY97. The implication is that if the company continues along its aggressive acquisition path according to plan, earnings growth in the 40% range is achievable. The trailing p/e is half that.
PMSI stock has leaped 136% in the past six months and has tripled over the past two years. It currently sits just a bit off its all-time high of $11, set on Feb. 28 when the company last reported earnings. PMSI carries an EPS rank of 99 and a relative strength of 96 from Investors Business Daily. Healthcare stocks generally have been performing quite well recently: Group Strength = A.
First Call lists only two analysts covering the stock presently, both rating it a "strong buy". PMSI provided me with info from five analysts--all "buy" or "strong buy" ratings. A total of 15 institutions collectively own around 9% of PMSI shares. As the stock price moves consistently above the $10 mark, it may well attract other institutional investors.
Average daily volume is around 20,000 shares. Total shares are approximately 15.5 million. The stock pays no dividend.
CONCLUSION
PMSI is a niche player in a lucrative sub-sector of the healthcare services industry. Management has a clear strategy: acquire and prosper; and they appear to be executing it flawlessly. Using PMSI's current, conservative multiple as a guide, a $14 target price within the year is plausible--i.e., a 40% gain.
--Greg Markus (MF Boring)