[Final] USPH Slides-UTD
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Transcript of [Final] USPH Slides-UTD
CFA INVESTMENT RESEARCH COMPETITIONSOUTHWEST REGIONAL FINAL PRESENTATIONS - USPH
EXECUTIVE SUMMARY
PHYSICAL THERAPY INDUSTRY OVERVIEW
COMPETITIVE POSITIONING & STRATEGY
FINANCIAL ANALYSIS & COMPARABLE MULTIPLES
VALUATION & INVESTMENT RISKS
CONCLUSION / Q&A
Outline
o Largest public pure-play physical therapy company in the U.S.o Over 525 clinics in portfolioo 98% of total revenue is patient revenue
• 140% growth last 10 years• 94% is paid by 3rd party payors
USPH is a strong growth company, but it is currently overvalued
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
MARKET DATA (finance.yahoo.com)
CLOSING PRICE (2/23/17) $74.70
52 WEEK HIGH / LOW $45.76 / $76.25
AVERAGE VOLUME 63,116
SHARES OUTSTANDING 12.52 M
MARKET CAP $935.39 M
BETA 0.98
DIVIDEND YIELD 0.91%
TRAILING P/E RATIO 38.70x5/2
9/92
4/1/9
3
2/1/9
4
12/1/94
10/1/9
5
8/1/9
6
6/1/9
7
4/1/9
8
2/1/9
9
12/1/9
9
10/1/0
0
8/1/0
1
6/1/0
2
4/1/0
3
2/1/0
4
12/1/0
4
10/1/0
5
8/1/0
6
6/1/0
7
4/1/0
8
2/1/0
9
12/1/0
9
10/1/1
0
8/1/1
1
6/1/1
2
4/1/1
3
2/1/1
4
12/1/1
4
10/1/15
8/1/1
6$0
$10
$20
$30
$40
$50
$60
$70
$80
22.7% 28.3% 24.5% 18.5% 6%
USPH Revenue by Payor (2015 10-K)
Manged Care Programs Commercial InsuranceMedicare/Medicaid Workers' Comp.Other
TEAM PRICE TARGET: $58.24
CURRENT MARKET PRICE: $74.70
1
Physical therapy industry is poised for continued growth the next several years
Cons Pros
Payor Cost Advantage
PT Awareness
Demographics
Regulation
19501960
19701980
19902000
20102020
20302040
20500%
5%
10%
15%
20%
25%
Population % 65+ (census.gov)Historical Projected
56% Growth
from 2010
EXECUTIVE SUMMARY INDUSTRY OVERVIEW FINANCIAL ANALYIS
POSITIONING& STRATEGY
VALUATIONINVESTMENT RISKS &
CONCLUSION
2
Industry projected to grow at a 1.6% CAGR over the next 5 years to almost $32 billion
20072008
20092010
20112012
20132014
20152016
20172018
20192020
2021$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
-4%
-2%
0%
2%
4%
6%
8%
10%PT Industry Revenue in Millions (IBIS World)
Projection Historical Growth %
PT In
dust
ry R
even
ue in
Mill
ions
Reve
nue
Gro
wth
Rat
e
Slowing Growth Rate is a Sign of a Maturing Industry, Industry Consolidation Usually Follows
3.6% CAGR ‘07-’16
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
3
Health-South; 13%
Kindred; 5%
Select; 3%
USPH; 1%
Other; 78%
Industry Revenue by Market Share (IBIS World)
PHYSICAL THERAPY
$29.5 BMARKET SIZE
Highly fragmented industry presents opportunity to consolidate and capture market share
Kindred Select USPH HealthSouth
$652
$1,972
$899
$3,753$3,982
$4,916
$974
$6,984
PT Industry Players in Millions (Capital IQ)
Market Cap Enterprise Value
Specialty Hospital Operators
Inpatient Rehab Hospital Operator
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
4
Being a pure-play firm, USPH trails in gross margins, but excels in profit margins due to management’s consistency
2013 2014 20150%
10%20%30%40%50%
35% 36% 36%44% 46% 43%47% 46% 42%
19% 19% 16%25% 25% 24%
Gross Margins
Tenet Healthcare Kindred Heathcare HealthSouthSelect Medical USPH
2013 2014 2015
-5%-3%-1%1%3%5%7%9%
11%13%15%
-1%
0%
-1%
-4%-2% -1%
14%
9%
6%4% 4% 4%
5%7% 7%
NI Margins
Decrease in margins due to increasing salary obligations
20112012
20132014
20152016
0%
5%
10%
15%
20%
25%
30%
USPH MARGINS
Gross Profit EBITDA EBT NI
Screening criteria in Appendix 12 of report
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
5
Industry players mostly finance using debt; USPH uses equity & cash flow
2013 2014 20150
2
4
6
8
10
12
14
16
Liabilites-to-Total Equity Ratio
Tenet Kindred HealthSouthSelect Medical USPH
2011 2012 2013 2014 2015 20160%
10%20%30%40%50%60%70%80%90%
100%
10% 9% 10% 10% 7% 8%16% 12% 20% 18% 21% 20%
66% 68% 57% 60% 58% 56%
9% 10% 12% 12% 14% 16%USPH Balance Sheet Breakout
MINORITY INTERESTS TOTAL EQUITY TOTAL L-T LIABILITIESTOTAL CURRENT LIABILITIES
USPH has Strong Debt Coverage & Liquidity Ratios
CURRENT RATIO – 2.7x
COMPS – 1.24x
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
6
Operationally, pure-play PT clinics are more efficient and require small capex investment
2013 2014 20150
10
20
30
40
50
60
70
80
90
Operating Cycle (Days)
TenentKindred
HealthSouth
Select MedicalUSPH
2011
2012
2013
2014
2015
2016
$18.9m
$17.2m
$13.9m
$15.9m
$26.2m
$28.3m
$8.1m
$8.3m
$47.9m
$12.7m
$20.8m
$24.4m
$3.2m
$4.2m
$4.6m
$5.2m
$6.3m
$7.5mUSPH Operating Expenditures
CapEx
Cash Acq.
NWC
• Capex supports De Novo clinic growth
• Acquisitions are an active part of USPH’s strategy
• NWC supports all
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
7
USPH is positioned to take advantage of market fragmentation via acquisition strategy
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -
10
20
30
40
50
60
$0
$50
$100
$150
$200
$250
$300
$350
Patient Revenue De Novo Acquired Closed Total Clinic Δ
Clin
ic #
Reve
nue
in M
illio
ns
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
8
M&A goal is to acquire strong clinic groups at attractive valuations using cash flow and revolver
2011 2012 2013 2014 2015 20160.0m
0.2m
0.4m
0.6m
0.8m
1.0m
1.2m
0.4m
0.6m
1.1m
0.6m
1.0m 1.0m
Cost per Acquired Clinic
Cost per clinic acq Average
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
2007 2008 2009 2010 2011 2012 2013 2014 20150m
20m
40m
60m
80m
100m
120m
140m
160m
180m
Total Financing and Acquisitions
Operational CF Revolver Cash Acq.
Aug. 27th,200
7Original 4-Year Credit Agreement of revolving
credit
Oct. 14th,2010 Extended
Term of $50MM Credit Line
through August 2015
Jul. 14th,2011 Increased
Credit Line to $75MM in
August 2015
9
Dec. 6th,2013 Amendmentthrough November 2018
Company Overview Industry & Competitors
ConclusionRisk AnalysisValuationFinancial Analysis
D
D
Management is conservative, yet opportunistic; they will take advantage of current environment
STAR Acquisition
2007
51 Clinics$23 Million Price$19 Million Cash 6/1
/14
8/1/1
4
10/1/1
4
12/1/1
4
2/1/1
5
4/1/1
5
6/1/1
5
8/1/1
5
10/1/1
5
12/1/1
5
2/1/1
6
4/1/1
6
6/1/1
6
8/1/1
6
10/1/1
6
12/1/1
6
2/1/1
70K
20K
40K
60K
80K
100K
120K
140K
160K
$0
$10
$20
$30
$40
$50
$60
$70
$80 Stock Price
USPH Insider Holdings vs. Stock Price
# Sh
ares
Hel
d
Stoc
k Pr
ice
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
10
2016Amendment to
Credit Agreement
2017Aggressive Acquisition
Moderate De novo2018
Obligation due
Higher Interest rate
Acquisition Growth
Revenue Growth
Net Income Growth
Credit Growth Integration
De novo growth
USPH follows a predictive growth cycle; we project the recent increase in credit growth to boost near-term acquisitions
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
11
Revenue Growth
Change inClinic Amount
Change inPatient Visit/Clinic
Change in Net Rate/Visit
De novo
Clinics
AcquisitionClinics
20062007
20082009
20102011
20122013
20142015
F2016
F2017
F2018
F2019
F2020
-10
0
10
20
30
40
50
60
-5%
0%
5%
10%
15%
20%
25%
30%Projected Acquired ClinicsHistorical Acquired ClinicsProjected Revenue Growth RateHistorical Revenue Growth Rate
# of
Acq
uire
d Cl
inic
s
Reve
nue
Gro
wth
Rat
e
Year 2013 2014 2015 F2016 F2017 F2018 F2019 F2020Revenue Growth
Rate6.10% 16.15% 8.55% 7.80% 8.30% 15.00% 8.00% 8.00%
Revenue growth is a function primarily of acquisitions
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
12
2016-2017 2018-2020
8.7%0 100%
50%
25% 75%
10%
8.1%0 100%
50%
25% 75%
5%
Cost of Debt
Cost of Equity
Cost of Debt Cost of Equity-1.00%
1.00%
3.00%
5.00%
7.00%
9.00%
3.05%
6.44%
Cost of Debt Cost of Equity-1.00%
1.00%
3.00%
5.00%
7.00%
9.00%
2.47%
5.94%
8.41%9.49%
Cost of Debt
Risk free rate
MRP*beta2.60%3.10%
Chang inAccounting Guidance
WACC will change in 2018 due to credit agreement and GAAP
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
13
4%Growth Rate
of FCF after 2020Acquisition Growth Scenario
2 Stage WACC
NPV of FCF from 2016-2020
3%Growth rate
of FCF after 2020 De novo Growth Scenario
$58.13
$63.00
Two Scenarios under 3% and 4% terminal growth rate
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
14
Price: $58.85
2013 2014 2015 F2016 F2017 F2018 F2019 F2020After 2020
(SGR)Dividend
Payout Ratio37.7% 28.3% 33.2% 33.2% 33.2% 33.2% 33.2% 33.2% 33.2%
Projected ROE 11.9%Dividend
Growth Rate 11.6% 22.9% 25.4% 21.4% 10.6% 18.0% 17.4% 10.1% 7.9%
2013 2014 2015 F2016 F2017 F2018 F2019 F2020 After 2020
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
7.9%
Dividend Growth Rate
Dividend payout is projected to remain constant at 33.2% and we arrive at a price target of $58.85
EXECUTIVE SUMMARY
INDUSTRY OVERVIEW
FINANCIAL ANALYIS
POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &
CONCLUSION
15
11.9x 10.2x
80.69% 76.11%
14.1x 10.7x
67.19% 74.64%.
19.5xEBITDA
Multiple
15.46%Debt/Capital
• Circles Indicate Capital Structure• Business (USPH is the only one to
operate pure physical therapy rehabilitation services;
• Overvalued (all the multiples)
Multiples valuation shows USPH is more highly valued than its peers based on EV/EBITDA; USPH is overvalued
EXECUTIVE SUMMARY INDUSTRY OVERVIEW FINANCIAL ANALYIS
POSITIONING& STRATEGY
VALUATIONINVESTMENT RISKS &
CONCLUSION
16Data Date: Feb. 23th, 2017
Sell Hold Buy
67% 27% 6% Input to simulations:• Long-term growth
rate• WACC• Tax Rate• 100,000 Trials
Mean: $ 60.02Median: $ 58.17
Monte Carlo simulation gives a 67% probability of a sell recommendation, 27% hold and only a 6% buy
EXECUTIVE SUMMARY INDUSTRY OVERVIEW FINANCIAL ANALYIS
POSITIONING& STRATEGY
VALUATIONINVESTMENT RISKS &
CONCLUSION
17
40%
20%DCF:
Acquisition Growth Scenario
40%
DDM20%
40%
DCF:De novo Growth Scenario
40%
$58.13 $63.00 $58.85
Target: $58.24
$74.70
Market
Date: Feb. 23th, 2017
DDMDCFAcquisition
GrowthScenario
DCFDe novoGrowthScenario
$58.85$63.00
$53.18
Target
$58.24
We use a weighted approach to discount rate, arriving at a price target well below current market values
EXECUTIVE SUMMARY INDUSTRY OVERVIEW FINANCIAL ANALYIS
POSITIONING& STRATEGY
VALUATIONINVESTMENT RISKS &
CONCLUSION
18
Market risk constitutes the largest section of investment risks; economic and operational risks are key as well
High
MR-PE* OP-PT
Moderate OP-WT
EC-UN MR-MD* MR-RB*
Low MR-RG* OP-LQ*
Low Moderate High
HIGHLIGHTS• MR-RG Regulation, Reporting & Confidentiality• MR-RB Reimbursement• MR-MD Medicare/Medicaid• MR-PE Private Equity Players• OP-LQ Liquidity Crisis
Probability
Impact
Market Risk
Operational Risk
Economic Risk
- *Denotes in Highlights- Full Risk section in Report on page 9
EXECUTIVE SUMMARY INDUSTRY OVERVIEW FINANCIAL ANALYIS
POSITIONING& STRATEGY
VALUATIONINVESTMENT RISKS &
CONCLUSION
19
CFA INVESTMENT RESEARCH COMPETITIONSOUTHWEST REGIONAL FINAL PRESENTATIONS - USPH