CorVel (CRVL 2.08%) provides medical cost containment and managed care services to insurance companies, third-party administrators, governmental entities, and self-administered employers to assist in managing costs and monitoring the quality of care.
Services provided by the network solutions segment are designed to reduce the price paid for medical services in workers' compensation cases, auto policies, and group health policies. Services provided by the patient management segment are designed to monitor the necessity and appropriateness of health care services provided to workers' compensation and other health care claimants and to expedite return to work. Virtually all revenue is generated within the U.S.
CorVel is one of the few publicly traded, pure-play claims management providers. CorVel competes primarily with Crawford & Company, as well as managed care providers, preferred provider networks and insurance companies with large workers' compensation lines such as The Travelers Companies and Hartford Financial Services.
Fortunes are made during times of crisis
The issue of rising health care costs was at the center of the recent government shutdown. Instead of listening to the talking heads and bickering politicians, investors should instead look for ways to profit from these types of crises. For example, management said on the most recent conference call that the Patient Protection and Affordable Care Act, commonly known as Obamacare, actually increased customer interest in its medical review services.
CorVel serves an important non-partisan, public policy initiative: the need to slow the rate of growth of health care costs through improving medical cost management, reducing fraud/abuse and shortening the length of the disability.
CorVel has multiple competitive advantages. First, its proprietary bill review and claims management technology, including an artificial intelligence engine, automates the review process and results in a faster turnaround time and greater efficiencies. By moving the entire process online, from scanning and automatic data capture to bill review and approval, workflow is significantly increased.
Second, its integrated claims model controls costs by intervening at an early stage in a claim, which reduces costs and shortens the length of the disability.
Third, CorVel gains a valuable network effort with the data collected from the many long-term relationships and diverse customer base.
Strong growth and a strong balance sheet
In the most recent quarter ended in June, revenue increased 13% to a record $118 million driven by strength in each of the two business segments, an expanded product line, and the addition of several valuable accounts. The high operating leverage drove a 38% increase in earnings per share to a record $0.40.
The consistent high free cash flow provides two key benefits. First, CorVel is able to internally fund operations without levering up the balance sheet or diluting shareholders. Second, CorVel is able to use excess capital to reward shareholders through share buybacks.
For example, in August the board of directors approved a 2 million share increase to the existing buyback program. In the most recent quarter ended in June, CorVel spent $7.3 million buying back shares and around $3.9 million more subsequent to the end of the quarter through July 24 buying even more shares.
Since the beginning of a buyback program in 1996, CorVel bought back $309 million of shares, or 60% of the total outstanding shares. More importantly, the average price paid was $9.77 per share, or 75% below the current price. This is not an insignificant accomplishment considering so many companies waste shareholder money buying back shares at elevated levels.
Although Crawford & Company delivered a 36% return on equity last fiscal year, this is due mainly to its debt-to-equity ratio of 102%. CorVel delivered a return on equity last fiscal year of 24% despite being debt free. Moreover, CorVel had no interest-bearing debt for the past 21 years.
The two largest risks facing CorVel is a decrease in the amount of work outsourced by payors and a decline in workers' compensation claims. However these risks are reduced for two reasons. First, the trend toward outsourcing should continue as it is simply more efficient for payors compared to doing this work in-house. Second, workers' compensation claims typically decline due to weaker economic growth that results in lower employment. However with the falling unemployment rate, the number of claims should increase as more people return to work. Let me be clear: I am not saying more workplace injuries are a good thing. I am merely stating a historical statistical relationship.
Bottom line
Despite the 74% rise year-to-date, CorVel is still attractive with a P/E of 15, strong growth prospects and lack of analyst coverage. Investors should take comfort knowing that insiders have plenty of skin in the game as they own about 47% of the stock.
