First Union Securities Changes Target Price for PLMD
03/26/01 08:30 AM
Source: First Union Securities
Company Notes:
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PolyMedica Corporation (PLMD-NASDAQ)
Target Price Change
Shares Fall 50% On Announcement Of FBI Investigation 2 Years Ago
Shares Appear Statistically Cheap--Reiterate Strong Buy Rating
Rating: 1
Price: $17.00
52-Wk. Rng.: $62-17
Shares Out.: (MM) 13.3
Market Cap.: (MM) 226.1
Key Points
Shares of PLMD fell approximately 50% on Friday due to a report of four customer complaints in June 1999 that were referred to the Federal Bureau of Investigation (FBI) for investigation.
While any company dealing with Medicare is subject to constant scrutiny, it appears that PLMD is not currently subject to an investigation.
We believe PLMD and its Liberty Medical Supply subsidiary have the intent to comply with Part B federal regulations related to its business.
We feel that Friday's activity was an overreaction to the announcement. Currently, shares of PLMD appear statistically cheap, trading at 6.7x our calendar 2001 EPS earnings of $2.54. We have maintained our fiscal Q4 2001, fiscal 2001, and fiscal 2002 EPS estimates of $0.59, $2.16, and $2.65, respectively. Also, at current prices, PLMD shares are trading at 4.65x estimated March 2001 EBITDA of $50 million. Using an enterprise value-to-EBITDA valuation of 8x fiscal 2002 EBITDA (excluding amortization of advertising expenses), we have adjusted our 12-month target price to $36 from $72. We reiterate our Strong Buy (1) rating on the shares.
Company Description
PolyMedica Corporation is a nationwide provider of direct-to-consumer specialty medical products and services, primarily focused on the diabetes supply and consumer healthcare markets.
Discussion
Shares of PLMD cut in half after announcement regarding 1999 FBI investigation into four customer complaints. The shares of PLMD were down over $16 on 7.5 million share volume after an annoucement confirming the existence of four customer complaints in June 1999. According to a government response, an investigation into PLMD™s billing practices began in June 1999, but that management was never contacted. In December 1999, the Atlanta office of the Inspector General of Department of Health and Human Services (HHS) referred the investigation to the FBI™s health care fraud unit and asked the FBI to notify HHS if action was needed against those who participated in the Medicare program.
Currently, it appears that PLMD is not subject to an investigation by the FBI. While the FBI may have investigated PLMD™s billing practices in the past, it appears the company is not the subject of an investigation at this time. A second request under the Freedom of Information Act, by David Kliff, publisher of the Diabetic Investor, indicates that upon a review of the Central Record System, the FBI is not currently investigating PLMD. Management of PLMD indicates that it has not been contacted by federal agencies regarding any investigation. The company has had routine audit requests by the Durable Medical Equipment Resource Center (DMERC) intermediary to which it has quickly responded when information requests have been made.
We sense PLMD™s intent is to fully comply with applicable Medicare regulations. Any company that is involved in Medicare reimbursement is constantly under scrutiny by several federal regulatory agencies such as the HHS, FBI, Department of Justice, and the fiscal intermediaries; however, PLMD, in our opinon, has the intent to comply with applicable Medicare regulations. We note that, at the end of December 2000, PLMD had approximately $13.35 million in unbilled Medicare claims, indicating that, although PLMD had shipped product orders, it had not yet billed Medicare due to incomplete documentation. In our opinion, this balance sheet line item represents PLMD™s efforts to comply with Medicare documentation, billing, and reimbursement regulations.
We believe Friday™s activities were an overreaction to the announcement. In our opinion, the dramatic sell-off was an overreaction to the announcement. Management plans to host a conference call today at 8:30 AM to discuss the situation. We continue to believe that PLMD is a valuable asset generating an estimated 77% internal rate of return on its diabetes client base. Currently, shares appear statistically cheap, trading at 6.7x and 5.5x our calendar 2001 and 2002 EPS estimates of $2.54 and $3.10, respectively. Using an enterprise value-to-EBITDA valuation of 8x fiscal 2002 EBITDA ($62 million excluding amortization of advertising expense), we have adjusted our 12-month target price to $36 from $72. Currently, PLMD shares are trading at an enterprise value-to-EBITDA of 4.65x on March 2001 EBITDA estimated at $50.1 million (excluding amortization of advertising expense). We have maintained our fiscal 2001 and 2002 EPS estimates of $2.16 and $2.65, respectively, and we reiterate our Strong Buy (1) rating on the shares.
Additional information available upon request.
First Union Securities, Inc. maintains a market in the common stock of PLMD.
First Union Securities, Inc., or a predecessor, managed or comanaged a public offering of securities for PLMD within the past three years. This is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments mentioned. Interested parties are advised to contact the entity they deal with, or the entity that has distributed this report to them. The information has been obtained or derived from sources believed by us to be reliable, but we do not represent that it is accurate or complete. Any opinions or estimates contained in this information constitute our judgement as of this date and are subject to change without notice. First Union Securities, Inc. (icFUSIle), or its affiliates may provide advice or may from time to time acquire, hold or sell a position in the securities mentioned herein. FUSI is a subsidiary of First Union Corporation and is a member of the NYSE, NASD and SIPC. Copyright © 2001 First Union Securities, Inc. FUSI is a separate and distinct entity from its affiliated banks and thrifts.
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To me, the key sentence in the above is the statement that a second Freedom of Information Act request found that the company is not under investigation by the FBI.
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