This is an excerpt from the Boring Portfolio's recap from Tuesday, July 15. The recap was written by Mark Weaver.
"With that in mind I'd like to focus on one of the Borefolio stocks, PRIME MEDICAL
SERVICES (Nasdaq: PMSI) (N) (S).
Prime was one of my picks in the long defunct Healthfolio. Late last spring, PMSI was a
3-bagger for me, and at the same time it was the best performer in the Borefolio.
Over the past year, though, the stock has languished. What's the deal?
Well, PMSI has not been alone as a snoozer in the outpatient and homecare stock group. The
entire group has underperformed the market in the past year, as uncertainties about Medicare
reform and managed care reimbursement have cooled investors enthusiasm for these
companies.
This stock group sports a relative strength rank of 91 out of 197 groups covered in Investor's
Business Daily -- almost precisely where the group stood six months ago. So far in 1997, the
sector is up only 10.8% -- less than half the S&P 500's return. In my opinion, the
underperformance of these stocks presents a golden opportunity to pick up some bargains.
Is PMSI a bargain? To my eyes that question can be answered with an unequivocal yes! Using
the Boring Stock criteria, I see an undervalued stock, a high quality company that is a leader in
it's business, offering excellent service in a steadily growing business (especially with the
new Prostatron joint partnership for benign prostate enlargement), and the company is poised
to continue making money for a long time to come. Top this off with exceptional management
and you've got a winner.
Speaking of management, yesterday Chairman Kenneth Shifrin was honored by Ernst &
Young with the 1997 Entrepeneur of the Year Award in the "Services" category. He was
honored for the dramatic turnaround he has engineered at PMSI.
Looking at valuation, I see a stock with a PEG of 0.67 based on estimates of $0.86 for fiscal
year '98. The YPEG valuation is over $20 per share based on these estimates and an
estimated annual growth of 24%.
If you look at First Call estimates, don't be tricked by what appears to be only a modest
projected earnings increase between fiscal year '97 and '98 earnings estimates. PMSI enjoys
a favorable tax rate of only 24% for the 1997 fiscal year whereas 1998 earnings are fully taxed.
Taking this into account near term growth is in the 43% range. In this frothy market PMSI
appears to be a steal.
Prime will report results for the June quarter on July 24. According to First Call, analysts'
consensus expectation is for earnings of $0.19 per share.
Today, Prime fell $1/8 to $11 7/8 on the heels of a recent runup from $10 1/2 per share."
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