This article is part of our Rising Star Portfolios series.
I'm constantly on the hunt for companies that create value for customers. One company I recently came across is doing just this in the health-care field, an industry riddled with inefficiencies. Let me introduce you to Emdeon
Emdeon makes its customers' lives easier by taking care of the nuts and bolts of health care -- billing, payment management, claims processing, and even electronic prescriptions for pharmacies. Its customer base includes health-care providers such as hospitals, physicians, and dentists, and health-care payers, primarily insurance companies.
For health-care providers, Emdeon performs what's known as revenue cycle management, verifying patient eligibility, submitting claims, and managing the payment process. This is vital because Emdeon simplifies complicated paperwork and ultimately helps health care providers get paid. Many hospitals are cash-strapped, making Emdeon's services very useful.
For the insurance companies paying the bills, Emdeon's services are almost equally important. In this case, Emdeon manages the complex claims process, simplifying and reducing administrative costs. This is important because these companies must keep administrative costs low. New regulations stipulate that insurance companies must have minimum medical loss ratios of 80%-85% of total premiums received. That means a maximum of 15%-20% of premiums can go to profits, administration, salaries, and other non-medical care areas. This regulation put pressure on companies to reduce administrative costs, and Emdeon helps them achieve that goal.
Leadership and competition
Emdeon has the leading position in its market with McKesson
This is a predictable, fairly slow-growing business, but it does have some faster growth areas, one of which is fraud prevention. Health care suffers from significant amounts of fraud, and insurance companies are eager to stamp it out. Emdeon is just getting started in this area, offering services that identify fraud before it's paid for by insurance carriers, a service that should be beneficial for Emdeon's customers, the company, and the industry as a whole. Other growth areas include data analytics and services where the company uses its platform and vast market knowledge to create more value for customers. Finally, the company is helping providers comply with new regulations, as shown with its partnership with LabCorp
One of Emdeon's endearing traits is its recurring revenue. Customers typically renew every year, which makes the business very predictable. All told, 90%-95% of revenues recur each year, with the balance made up of special projects. Emdeon reports 2010 results on March 8, but for the trailing 12 months, the company generated $965 million in revenue, $119 million in operating income, and $13 million in net income. Free cash flow (after stock-based compensation expense) was $64 million. At roughly $15.65 per share (including convertible class B shares), the market capitalization is $1.8 billion, and enterprise value $2.7 billion. The stock therefore seems well-priced, but it won't hurt to add the company to your watchlist, as I will.
Despite steady, recurring revenue and a leading market position, there is the risk of competition that results in pricing pressures. And although Emdeon is not paid by Medicare or government entities, its customers often face financial pressures, which could impact the revenue Emdeon ultimately receives. The company also may make selected acquisitions, which could add a layer of risk if they don't deliver. Finally, management's cash bonuses are based on adjusted EBITDA and revenue targets, which means the bottom line might be neglected more than it would be if bonuses were tied to it.
It's always refreshing to find companies that create value -- in this case, streamlining our health-care system so that health providers and insurance companies can stop drowning in paperwork and start focusing on what they do best. This division of labor has served capitalism well, and it should do the same for our fragmented, inefficient health-care system. Emdeon is an interesting way to hopefully profit from the strong drive to improve the efficiency of our belabored system.
This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).