PFHO - Where were you when this company was trading at $0.5-$1? ;) We are looking at the tail of a ten bagger. Sure it still looks undervalued in some metrics, but the number of questions is much longer than it would be before the runup. So:
- Why the huge growth now? It's not as if this company discovered Eldorado. It's been around for 10 years plus ( gurufocus.com ). How come there was no growth for 10 years and then suddenly 50% revenue growth rates?
- How do we know business is sustainable? Maybe they are overbooking, aggressively overselling the business and the 50% growth will be followed by revenue drop or dissatisfied clients, etc? They cite some risks themselves (i.e. clients bringing processing inhouse to save on costs).
- I'll play both sides here: if this is such a great business, how come PFHO is so small? Why don't many more employers sign up with them? What do other employers do? "Although we are one of the first commercial enterprises capable of offering HCO and MPN services, there are new companies that are currently setting up similar services as those we offer. Many of these competitors may have greater financial, research and marketing experience and resources than we do, and they represent substantial long-term competition . As of December 2011, in California there were nine certified health care organization licenses issued to six companies, (two of which belong to the Company.) This translates into five direct HCO competitors. By contrast, there were 1,770 approved MPNs in the State of California, 58 of which are administered by the Company." Maybe most employers don't use HCO/MPNs at all? Note that most of the growth comes from other revenues and not HCO/MPN. Perhaps we should look at the MBR/NCM/UR growth really. Is this part of business sustainable? What are competitors there?
- Cash flows. It is usually a red flag for me when OCF is hugely lower than earnings. They have made 500K in 9 months of earnings, but only 100K in OCF ( yahoo.brand.edgar-online.com ). This is usually a sign of channel stuffing/overbooking. A/R increased by 800K at the same time. Overall A/R is 1.3M. This is a risk.
- Company history and organization. Read the Company History section in 10K ( yahoo.brand.edgar-online.com ). They went public as RTO. Most their business is done through wholly owned subs. I won't call "fraud", but 5M run rate company having 5+ wholly owned subs is rather extravagant IMO. Why would they do it? Is it due to legal reasons? But they say "New sub AAA will be responsible for overseeing and managing XXX previously managed by our subsidiary BBB", so legally BBB could have managed it too without the need to create AAA...
- Significant customers. Note concentration of business in 4 customers. Note the drop of business in customer B from 22% to 12% revenues. If a customer walks, this would be a hit to the company.
- CEO/CFO - you have to make your own opinion, but their biographies do not inspire confidence in me. Note that CEO was running two companies at the same time as he was running PFHO including running one of them into bankruptcy. CFO is a colorful figure too. (To be fair, this is disclosed in 10K).
In summary, there are bunch of risks. Some of them are expected for such a microcap company - microcap is usually a microcap because it has issues.
IMHO, the likely scenario will be a blowup at some point due to sales/earnings/cash flow drop and/or escalating wage costs. There might be accounting issues too. However, it is also possible that the company will grow another 10X before blowing up or even without blowing up. It will depend on the people who manage "other" business lines that are growing now. I can't say I know which scenario is more likely.
Disclosure: I own no shares in PFHO and make no claims about my future plans. :) |
