ADVH: My summary
My father is not internet-savvy. He recently bought ADVH at my recommendation. He asked me if I was still following the stock, and to explain what was going on. I collected some recent postings (mostly by me--on the Yahoo boards) to summarize the last couple weeks. Here it is.....
I started the ADVH thread on Silicon Investor. I am a practicing physician. My group is in the business of global risk contracting (what ADVH does). My 60 doctor group in the midwest is flourishing-making embarassing profits from the sort of contracting which ADVH does. If you can hold on to the stock, I'd recommend doing so. I'm not sure that I'd put more money into this because somebody must be selling massively and I don't know why. The question is...who is it who doesn't know something--the buyers or the sellers? ADVH is sweeping money under the rug to ensure an orderly earnings progression in the future (i.e. on a rainy day). My father used to do this when he owned a small business. It is very healthy. I know of nothing industry-wide (i.e. HCFA reimbursement problems etc.) that is about to clobber ADVH or my own medical group.
I like to buy good stocks that are behaving like good stocks. ADVH seems to be an excellent company but its stock is not acting that way. I'd suggest buying more when somebody new recommends it or when it shows some strength.
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I am a practicing internist, not an attorney. Here is my understanding of the relevant law. Kickbacks for referrals to specialists are like fee-splitting & are illegal. But it is legal for a medical group to preferentialy refer patients to its own specialists. So the issue is....what defines a medical group? If doctors do their billing through the same entity and share stock/ownership, this is clearly recognized by the law as a common medical group.
There is nothing shady or underhanded about the restaurant meeting described in NYO. What is shady/undershanded is the timing of the article. If I was ADVH I would be asking the SEC to investigate short sales by people connected with NYO
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I tape recorded the conference call. Listened to Richard Lee's questions. I can't read his mind, but I think (from his questions) he had two concerns. First, Richard Lee had projected earnings of $1.50 in 1999 and mgmt's guidance during the conference call was $1.43. Second was probably the receivables. ADVH booked some orders near the end of Q1 and didn't get a chance to collect them yet. By the conference call on 5/12 ADVH had collected about half of that increment (i.e. they collected $2.7M of the roughly $5.4M increment in receivables). As I have listened to the conference call a few times, it stikes me that mgmt was not well-prepared to prove to skeptics how the IMM acquisition would be beneficial to future earnings. IMM lost a little under $1M in 1997. Early in the call mgmt claimed there would be huge synergies. Richard Lee asked them to quantitate how the synergies would occur. They couldn't. Of course they couldn;t. The acquistion was just closed this week. But just because mgmt is unwilling to make hasty promises does not mean it was a poor acquisition. I am a practicing internist who does global risk contracting. My life's work is in the business that ADVH does. The IMM acquisition was inspired. It has awesome potential.
Even if they make $1.43 instead of $1.55 in 1999, so what? We are looking at a sustainable earnings growth rate of over 30%. I would not hesitate to buy this stock under $20 per share, assuming that the investment time horizon is 12 months or more.
This stock has been the object of a massive short-selling campaign. It is probably connected the the two New York Observer articles, each coming out just after strong earnings reports. I am disappointed by Mr. Lee's actions. H&Q is a class outfit. I would have expected Mr. Lee to have the courage to stick by a $12 stock that has a 30% annual growth rate and current year EPS of $1 per share. Even if it was getting beaten up by short sellers. I tried to buy his downgrade report from Ivestools but it was not available. Thanks to Louis Riley, I think Mr. Lee will be proven wrong by the market, and that this will reflect poorly on his character.
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IMM is an HSMSO. How's that for alphabet soup! A hospital service management service organization. Hospitals are buuying up primary care practices right and left for the purpose of keeping their beds full. They are discovering that the skills needed to run hospitals and the skills needed to manage these physicians are very different. In one large study, the average physicians revenues declined 20% in the first year after being bought out by hospitals. The doctors go into semi-retirement and quit working so hard when they no longer have incentives to put in the long hours. ADVH bought them cheaply because nobody else is able to motivate these doctors to make their hospital ownership arrangment profitable. IMM is an inspired acquisition, IMHO, because ADVH is the only physician practice management company who has the mechanism for motivating physicians--global risk contracting.
For any readers who are unfamiliar with how global risk contracting can motivate doctors, please see this link
Subject 16421
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Louis Riley is open and honest about their position in ADVH. When do you think they bought the stock? Probably the morning they recommended it. It was down to 12 3/8 and probably would have gone lower were it not for him and his army of loyal followers. I would cry "foul" if he did not believe in ADVH enough to take a position for his capital management company in it.
Riley saw a good company getting smeared by the New York Observer and decided to do something about it.There is nothing suggestive of "pump and dump" action here. He has a 12 month target for ADVH. He even suggests holding on longer for $50. Maybe he will sell out in a few days, but I doubt it. There is too much open short interest out there just waiting to buy back in at a reasonable price. Beyond that, it may take a quarter or two for the market to fully appreciate the value of this company.
<<<Most reputable research firms are objective third parties with no interest in a company>>>
I suspect that most brokerages buy a stock before they recommend it to their customers. They then sell at a profit to their customers, who are buying back the brokerages shares when they place their orders from their broker. The brokerages just don't advertise this practice. They do acknowledge when the make a market or have long positions in stocks in the fine print at the bottom of the last page of the analysts reports.
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<<<What he [Louis Riley] failed to mention is that those 4 or 5 [analysts] have all downgraded the stock in the past 6 months.>>>
Lets compare notes here.
1) You are right that Richard Lee at H&Q downgraded from a strong buy (which he had released on January 5, 1998) to a buy on May 13, 1998. His last words in the report were..."Owing to the foregoing factors, we believe ADVH shares no longer meet our strict criteria for a STRONG BUY rating, which rating we employ only sparingly and then to indicate conviction in near-term stock outperformance. Accordingly, despite our continued bullishness on the company's operating strategy and fundamental outlook, we reduce our rating to a BUY.
2) On May 14, James Lane (Warburg Billion Read, Inc) reiterated his outperform (highest rating possible) on ADVH.
3) Kathy Miner of Cowen maintained a Strong Buy on May 13.
Please supply the names and corporate affiliations of the other 3 or 4 analysts who have downgraded ADVH in the last six months. If you cannot do this, I recommend that you acknowlege as much on this thread. We are all have family responsibilities and time constraints. We are comparing notes and trying to reconcile differences. We are all human. Its tempting to get a little careless with the facts on a thread that has been polluted with vulgarities recently. I posted inaccurate information about the Business Week article recently--I was at work and was in a hurry between patients--I think. But I know, if I dig enough I can back up my claims because I am confident that they have a factual basis.
If this is not the case with regards to the "4 or 5 analysts who downgraded", you might even consider apologizing to Mr. Riley, as it appears to me that you are flirting with slander in your 5:27 May 16 posting. He is a person trying to perform a public service, who should be treated with respect unless you have verifiable unequivocal evidence that he is lying.
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<<<I also find it hard to believe that Riley didn't mention that the HealthCare sector is also going under gradual reforms that could turn our health care system similiar to those found in Europe. Also, this Riley Capital Investment seems more like the STN Investors Newsletter that issued strong buy ratings on Ktel>>>
1) You are right this is the Louis Riley of Stock Trading Newsletter fame. KTEL was at 10 5/8 on 4/17/98 when Riley put out a strong buy with a very long, detailed justification. It peaked at 39 and 15/32 on 5/5 (so far). He stated that if it was rated with the same trailing price/sales ratios as other internet record companies (like CDNW) it should be around $800 per share. His actual target was something around $100. With KTEL he found a diamond in the rough and pointed it out. He also burned a lot of short sellers because the stock was so illiquid. On 5/13 the hi and low for KTEL were 31 5/8 and 28 1/4. Pump and dump? I think the point is that if one was a disciple of Riley, it would have been very difficult to lose money with KTEL. It still looks attractive to me, but I am in the medical field and tend to avoid stocks unless I understand their business.
2) I am in the exact same business as ADVH. I follow PPM's professionally as a consultant. Your statements about gradual reforms that could turn our system into those like Europe is a little vague. I guess you are referring to some of the "patient bill of rights" HMO reform legislation which is pending nationally, and has been implemented in varied forms in about a third of states.
I see this legislation as a potential POSITIVE for ADVH and my own global risk medical group. A key feature involves making the medical directors of HMO's legally liable to malpractice litigation when they deny payment for diagnostic testing or for therapeutic interventions. At present, the HMO's hide behind a loophole of the ERISA laws which enables them to evade legal responsibility when they deny testing or care. Meanwhile, the chumps (primary care physicians) who have to deal with conventional HMO contracting get sued when they acquiesce to the numerous games HMO's play to get them to agree to cutting corners in patient care* (*this isan enourmous topic--I don't want to turn this into a 5000 word posting--if you really have trouble believing me, let me know).
Meanwhile, at present ADVH and other physician-controlled groups are not protected by ERISA. If we deny care, we can be sued for malpractice because, with global risk contracting, we are both the doctor and the insurance company all in one.
So....the impending HMO reform legislation will do more good than harm for ADVH and for my group, IMHO. It levels the playing field by making all parties (insurance companies and primary care physicians) liable. The HMO's will lose their competitively advantageous ability to lower costs by tricking their PCP's into cutting corners.
I must say that I am surprised the Mr. Riley has been attacked so much on this thread. I think he did nothing but good for investors on KTEL (unless they were short). He isn't as powerful as Kathy Miner of Cowen (who incidentally has maintained her strong buy on ADVH). He is an indepdendent who apparently does a lot of reasarch and finds undervalued high-growth stocks--which is hard to do in this tired bull market. His strong buy is meaningful because he justifies himself in his lengthy press release (you have produced a "first" here--the first person to criticize his four-page release as being insufficiently detailed because it did not discuss possible health care reforms which are advantageous to ADVH).
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I recommend that you start with the Advanced Health Technologies section of the ADVH website
advhealth.com
The website is loaded with valuable information. If that is not enough, Jonathan Edelson has published some scholarly articles in professional journals about the design of MedEPractice and the importance of arming physicians with information about cost-effective choices at the time that they make decisions. When I got my investor packet from ADVH in Jan '97, these articles were included. They may still be available from IR at ADVH.
IMHO, Edelson is a medical IT genius. As you know, he also founded Physicians On Line. IT has been theAchille's heel of some high profile PPM's. IT is one of the key competitive advantages of ADVH, the others being....
2) their partnering with medical groups (rather than the failed acquisition model)
3) dominant market share in regions underpenetrated by HMO's and
4) global risk contracting.
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I am no CPA, either. Although the company was profitable, they were actually cash flow negative in Q1 due to the $5.4M increase in the accounts receivable. During the conference call, the CFO specifically admitted that ADVH was cash flow negative, and was grilled by the analysts about it. It was a negative, but was a fluke, in an otherwise stellar quarter.
The sector stinks, and is holding back ADVH's stock. I wonder how long it will take for the street to discern between the doomed PPM's which are based on the failed consolidation model, and the innovators like ADVH.
Thanks for taking the time to help me understand what is going on. I assume you read from the thread that of the $5.4 M increment in AR, about half has been collected since 3/31, and none of the debtors are in financial trouble. And that mgmt has promised positive cash flow in Q2 and the overall year. With this all as a given, do you still think the AR and cash flow are issues?
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My own medical group...
We don't use a PPM. We have been building our own managment skills by ourselves. The group has been together, with a core of about 25 doctors, for about 20 years. Because we had collected many of the elitephysicians in our area (about a third were chief residents--many of our docs were from the top schools in the country)we thought we had the talent to do this in-house. It has worked out better than we hoped.
We don't think we need ADVH, and ADVH would not want to be in our market, which has about 55% HMO penetration. We expect to double in size in the next 24 months. We have no plans to grow outside our metropolitan area, however. We're not like Pinky & the brain--trying to take over the world.
For us, the group is all about putting us physicians (& our patients) back in control of health care
decision-making. Our group is entirely owned by our physicians. We just want to do good medical care. Having fiscal strength enables us to have the luxury of seeing charity patients for free, paying our staff well, working fewer hours when we want, and giving high-quality care.
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Hi David. Well, I am long this company. And I just made a bunch shorting PHYC the second major PPM, which is in the process of seeking it's true value. Lou Riley hit it on the head that the problem with MDM, PHYC, and FPAM is that they do not bring enough value into medical practices to support their fees.
I consider those PPM's to be the first iteration of the PPM, the consolidators.
ADVH seems to have the idea that they will have to bring value to the table. Working with the clinical side and IT is going to be the second iteration. That is where value can be added. Not that ADVH is all about IT. But they do seem to realize that just being a consolidator won't cut it anymore.
As for Mr. Win, he seems to have a bone to pick with Riley. I would never consider shorting a company with these financials. Even if the stock price gets dragged down by PHYC, and the multitude of FPAM suits I would consider it a greater bargain.
Zebra
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A price of $50 in 12 months assumes numbers along the lines of 1999 EPS of $1.50 and a P/E of 33. It is not an impossibility. It probably hinges a lot on management's guidance about the year 2000 (when they provide this) and on what happens to the IMM acquisition.
As my privately-held 60 internist medical group does increasing amounts of global risk contracting, we are going through what appears to be a 3 or 4 year period of staggering growth in earnings per share.
ADVH has share dilution to drag down the EPS, and they don't have the cohesiveness of a one metro region group. But as the last two years have unfolded, it is apparent that global risk contracting is the most successful business model for managing health care--not HMO's, and not hospital ownership of physicians. Physicians have a tremendous untapped potential for creating value by using their knowledge, creativity and talents for practicing cost-effective medicine. They just aren't motivated to do so when owned by hosptials or treated like dirt in an adversarial relationship with HMO's.
Very few postings on this thread have come from people hoping to trade this stock for a week. Who knows where ADVH will be in May of 1999? Does anybody seriously think it will be under $20 per share?
It would be nice to see the stock in the upper teens already, but there is nothing weak or wrong about this company. So there wasn't a short squeeze and we all didn't have to choose whether or not to take a quick profit.
ADVH is still the best investment in PPM's available. It partners with physician groups--preserving physician ownership and control. But it also enables global risk contracting, which fundamentally changes the way medicine is practiced--it is the future of the medical profession.
It won't break my heart if the stock is at $30 in a year instead of $50. I could even handle $25.
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It is bizarre that the melt-down of FPAM, OXFD, and Medpartners would adversely affect ADVH's price. These sorts of companies represent the failed consolidator approach to physician management. ADVH's model is the solution to this problem. Money should be leaving the losers and moving to the winners. Instead, the winners are being dragged down with the failed business plans, because they are in the same industry sector.
This will not continue forever. I wonder how many additional quarters of outperformance by ADVH it will take before the big money figures out what is really going on.
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I would appreciate your help in interpreting the following data:
Here are the balance sheet valuations for the company's intangible assets at the end of the last six quarters:
Q4 96 $ 1,858,000
Q1 97 $ 1,831,000
Q2 97 $ 5,259,000
Q3 97 $10,427,000
Q4 97 $11,415,000
Q1 98 $ 9,317,000
Does anybody know if the decline in intangible assets between the end of Q4 97 and the end of Q1 98 had to be taken as an expense? If so, this difference ($2,098,000) depressed earnings by 19 cents per share in Q1 98. And would this expense (if realized) also have decreased cash flow in Q1?
Finally, can anybody highly recommend an accounting book which is oriented towards investors--i.e. one that teaches the games that some companies play with their numbers, and how to discern healthy balance sheets from sickly ones?
Balance Sheet holds assets.
Reduction of Assets means an expense has been recognized.
Whether the expense was cash or not cannot be acertained without looking at the specific assets. For example,
Cash and Marketable securities are like cash, and reducing them is to burn cash.
Conversly, Goodwill and Plant,Property & Equipment are amortized, and do not impact cash. In fact, their reductions are added back to net income to determine cash flows.
Intangible assets are like goodwill. And these are amortized. So yes, their amortization amounts appear in the expense portion of the income statement, but they do not burn cash.
Peter Lynch One Up On Wall Street gives some high level overviews on financial statement shenanigans.
Thanks for your help.
So, does it follow that, if management wanted to, they could have left intangible assets unchanged throughout Q1 98? They were increasing intangible assets every previous quarter. It appears they could have reported 40 cents per share profit, instead of what they did (which was to take a 19 cents per share expense, reducing profits to 21 cents while strengthening the balance sheet)?
If so, then why didn't any of the three analysts mention this in their updates on 5/14 and give management some praise for this?
If the company has this sort of fiscal strength and integrity, if I had a short position in this stock, this would scare me into covering.
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