Why Envision Healthcare Is Spiraling Downward

In this segment of the MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker consider the case of Envision Healthcare (EVHC), a physician-based healthcare company that provides staff to hospitals and other facilities.

It turned in a poor earnings report and cut guidance Tuesday, but its issues go deeper. The company's billing practices have come under heavy scrutiny, and now that the market is becoming aware of these alleged flaws in its model, investors and customers are both reacting negatively.

A full transcript follows the video.

This video was recorded on Nov. 1, 2017.

Chris Hill: The only thing shareholders of 3D Systems have going for them today is they are not shareholders of Envision Healthcare, which is a stock down 30% this morning after their third quarter profit fell, apparently, off a cliff. This is a company that you know a whole lot better than I do. What is going on here?

Bill Barker: This is a physician-based healthcare company. One of the things they do is staff ERs, or ER-type operations, anesthesia. There was an article that came out in July in the New York Times about the frequency that patients were getting extremely large bills. They would go into a hospital where their insurance was taken, and they would get emergency services, and then they would get a bill from a doctor who wanted to be paid for his service and was out of network, despite working in hospital or getting a reference from the hospital. And this would be upwards of $1,000, sometimes much more. And that came as a shock to the consumers. Frequently, it was this company, EmCare, which is a division of it, which was cited as being a culprit in this. So, the stock hasn't done very well coming out of that. Then, this quarter, the results show that they are getting some slippage in their emergency care. Normally, there are a lot of stocks that get hit, and there's an opportunity to talk about them and take shots at things that companies do, and I don't really like to do that for the most part because there are going to be some people that are owners of those stocks. In this case, it's more of a schadenfreude thing. Like, you're engineering your business around surprising people with large bills, and that gets exposed, and your stock craters, I don't feel too bad for you. That, apparently, as of today, looks like what's happening. There was the article back in July, and today, we're seeing some of this showing up in the numbers.

Hill: There are stocks that we talked about from time to time that get ahead of themselves, there's a little too much enthusiasm, and when they come down in price, that price is seen as being much more reasonable to the underlying business. Schadenfreude aside, when you look at Envision Healthcare and a stock that is 30% cheaper today than it was yesterday, is this more in line with their type of business? Or do you think, no, there's more of this to come?

Barker: Well, take a couple of metrics out there. This is a stock, now, going, after the 30% decline, it has a price to sales ratio of 0.6. So, it has more in sales annually than the value of the company. The forward price to earnings ratio based on the expected earnings for next year before today, and those have come down, but that's about 7X next year's expected earnings. Again, that guidance has come down, so it's probably in the low teens. So, I think there's a real business here which has been, I think, mismanaged. And they probably have real doctors that provide real care. And I'm not going to criticize individual doctors who are part of the program here, because they don't know all the details, I'm sure, of how the bills are getting paid. But, there are assets here, there's a network here. This might be something that would be better off being taken private, because the value here is potentially being under-appreciated by the market, possibly. But I think you have to go through these numbers a little bit to see whether this is in more trouble than that. This is a bad situation. You get bad headlines when you're on the wrong side of patient care, in terms of the bills. And that has shown up in the pharmaceuticals with prices of certain drugs having been jacked up. Valeant had a business model which was based on that, Shkreli, of course. This is the wrong place to be in terms of consumers in sympathy. So, they may need to be taken out, have a new name thrown on them, different management. I'm not sure what.

Hill: Quikster? That's available. Maybe not Quikster Healthcare, I don't know if that would go over well. I'm just spitballing here.