Zebra: "I look for ADVH to bounce on its merits."
And the merits are many. Most are included in Lou Riley's recommendation which certainly provides solid reasons to buy into this company. Lots more can be found on the Conference Call of last week. If you look at the chart, you can see that a break out at 18 should carry us into the twenties fairly easily. Please permit me to be so bold as to re-post Riley's recommendation. Long or short, it is worth a re-read, IMO.
HOUSTON, May 14 /PRNewswire/ -- Riley Capital Research has initiated coverage of Advanced Health Corporation (Nasdaq: ADVH - news) with a ''Strong Buy'' rating and an initial price target of $37.
''Advanced Health is a unique and entrepreneurial healthcare company that has consistently demonstrated the ability to generate and manage strong growth,'' says Louis Riley, Chief Analyst with Riley Capital
Research. ''We believe that most investors have either overlooked or mispriced this dynamic young company because of its membership in the mostly troubled healthcare sector. Companies that possess growth and balance sheet metrics similar to Advanced Health's in other industries often trade at forward price to earnings multiples well above their projected growth rates, as those projections are frequently met or exceeded. We feel that Advanced Health warrants a forward P/E multiple at least equal to its projected near-term forward growth rate of 35%, given its history of successful innovation and consistent execution. We think that ADVH could easily trade up to $37 based on current fundamentals and the potential supply/demand imbalance posed by the large short position in the stock. We think the stock could climb to $50 in the next 12 months if the company continues to execute as expected.''
''On Tuesday Advanced Health announced the results of its sixth quarter as a public company. The company reported record revenues and strong earnings, growing revenues by 142% and fully taxed earnings by 250% over the year earlier period. It was the sixth consecutive quarter in which the company reported earnings that met or exceeded analyst's consensus expectations. In addition, the company announced its largest opportunistic acquisition to date, more than doubling the number of physicians under management to more than 700 and blowing away the Street's expectations for all of 1998.''
''Advanced Health is well covered by Wall Street, with four of the five analysts that follow the company rating the stock a ''Buy'' or ''Strong Buy''. On Tuesday's conference call the company's CFO stated that he is comfortable with earnings estimates of $1.06 for this year - up 100% over 1997. The CFO also provided initial guidance for 1999, projecting earnings of $1.43 - a 35% gain over this year's estimates.
Analyst's consensus median long-term growth rate for the company is 25% annually over the next five years. Yet even with these expected torrid rates of growth ADVH trades at little more than 12 times this
year's estimates and nine times next years'. Advanced Health is indisputably one of the fastest growing companies in the healthcare sector, and has the best balance sheet metrics in the PPM industry.''
''We think that investors have dramatically mispriced the company for several reasons. First of all, a good part of the healthcare industry has been in turmoil. Several major companies suffered extensive damage in 1997, most notably Oxford Health (Nasdaq: OXHP - news) and Columbia Healthcare (NYSE: COL -news). Their problems led investors to worry that financial mismanagement and billing fraud might be widespread throughout the industry, tainting companies who face neither of those problems. Secondly, all of the ''big three'' physician practice management companies: FPA Medical (Nasdaq: FPAM - news); MedPartners (NYSE: MDM - news); and PhyCor (Nasdaq: PHYC - news) have recently experienced operational problems, most of which we believe can be attributed to their deficient business models. Thirdly, a research organization issued a report last October that took issue with some of the company's accounting practices. None of those practices were flagged by the company's auditors in their subsequent regularly scheduled year-end report. Fourthly, in September of last year the company sued a customer over failure to pay for software. That matter is still before the courts, but would have little financial impact if not resolved in the company's favor. Lastly, The New York Observer magazine has recently published two disparaging articles which alleged the company was the target of a federal investigation, based on a request for information that was made to Lenox Hill Hospital earlier this year by the local U.S. Attorney's office. The Department of Health and Human Services and the U.S. Attorney's office have both informed the company that they are not the target of a federal investigation. Curiously, each of the articles was published within days of the company reporting excellent quarterly results - first in mid-March and again yesterday. We are confident that investors will soon begin to look past all of these misguided concerns and start focusing on Advanced Health's compelling attributes.''
''We were surprised to see how quickly short interest ballooned in the stock over the past two months on the basis of the first inaccurate article in The New York Observer. As of April's report on Nasdaq short
interest there were almost 2.5 million shares sold short - an amount equaling over 40% of the stock's 6 million share float. Given the stock's average daily volume of about 154,000 shares over the previous four weeks, that large short position could take over three weeks to cover. We cannot fathom why the shorts would maintain this position in light of the company's excellent fundamentals and extremely undervalued stock price - it seems absolutely suicidal.''
''Advanced Health's main business is physician practice management (PPM) and physician network management. This side of the business generated over 85% of the firm's revenue in the just reported
quarter. Advanced Health's approach to PPM is unique in the industry in that the company, unlike most of its competitors, does not purchase practices (or the practices' assets) from the physicians it services.
Rather, the company preserves physicians' autonomy by partnering with them to manage their practice, while leaving the ownership in their hands. This innovative physician-empowering business model has
allowed Advanced Health to avoid the management problems plaguing competitors such as PhyCor and FPA Medical, who have seen disgruntled ''employee'' doctors break their contracts and attempt to regain
control of their practices.''
''Advanced Health's unique business model is also financially superior to its competitors' in that it does not require the company to tie up its capital by making large up-front cash payments to physicians. The
sagacity of this approach is clearly reflected in the company's pristine balance sheet: no long-term debt, $43 million in cash ($3.92 per share), and shareholders' equity of $8.69 per share. Moreover, the
company's model has enriched shareholders by minimizing the need for continual cash infusions through additional dilutive equity offerings or risk enhancing debt offerings.''
''Advanced Health's approach to PPM also differs from most of its competitors' in that the company does more than merely focus on implementing efficient billing, collection, and back-office management, as such administration only accounts for 15 cents of every healthcare dollar spent. Rather, the company provides physicians with a comprehensive PPM solution by also focusing on the other 85 cents that is spent on the delivery of clinical services. This is a key strategic approach, as more practices and networks are beginning to take risk-bearing contracts and other forms of managed care reimbursement that require their physicians to wisely manage the total health care expenditure in order to profit. ''
''The company's unique approach to PPM is driven by its leading edge information technology (IT) products. For instance, Advanced Health's Med-E- Practice system is run on a PC or on a lightweight,
wireless, hand-held computer tablet that doctors carry as they see patients. Med-E-Practices' software suite enables physicians to have immediate access to crucial patient information at the point of care. The suite includes such applications as SmartScripts, for online prescription writing; Med-E-Visit, for automation of billing; and Med-E-Referral, for automation of the referral process. These applications enable a doctor to quickly pull up a patient's history, identify preferred formulary drugs and in-network specialists, and enter billing information, all during the consultation with the patient. No longer does the practice waste time and money having nurses and assistants locate this information in the patient's chart or over the phone with the managed care payor, or having them later electronically input the same information that the doctor has already manually written.''
''Advanced Health has recently augmented its strong IT portfolio with new acquisitions that are expected to make significant contributions to revenues and earnings. Last September's acquisition of Bukstel &
Halfpenny added that company's Dr. Chart product to the mix. This software enables physicians to connect with a hospital for lab, X-ray, and pathology results. While IT is still the smaller side of the
company's business, it is growing rapidly, carries high margins, complements the PPM business, differentiates the company from its competitors (who typically offer third-party technology, if any at all) and supports our thesis that the company deserves a much higher P/E multiple than other traditional PPMs. On Tuesday's conference call management disclosed that the IT pipeline is very healthy. The
company is in discussions with 70 prospects for over $20 million in IT sales, and expects to close a third of those this year.''
''The company's proficiency in IT traces back to the company's Chairman, CEO and co-founder Jonathan Edelson, M.D.. Dr. Edelson began his career as a practicing physician - an internist. While in
practice he started a medical software company that was acquired by Value Health in 1990. He later co-founded two separate companies: Physicians' Online, which today is the largest online information service for physicians in the US, with over 150,000 physicians; and Advanced Health. In late March, Advanced Health was awarded two broad patents covering the invention of electronic prescription management
systems that automate the prescription writing process at the point of care. Dr. Edelson developed these systems along with another physician. The patents should further raise the company's profile with potential partners and customers.''
''Another driver of growth for Advanced Health in addition to their unique business model and leading edge technology is their geographic focus on the Northeast and East coast. Both markets are relatively
underpenetrated in terms of provider organizations. Tuesday's announced acquisition of Integrated Medical Management further bolsters the company's presence in the Northeast, as nearly 90% of IMM's physicians are located there. Advanced Health is now the largest PPM in the Northeast. We believe that the company's continued focus on this area may eventually give it the critical mass it needs to expand
prudently on a national scale. Of the almost 600,000 physicians practicing in the U. S., less than 10% are affiliated with a PPM.''
''Yet another driver of growth is the company's focus on large physician practices and networks. The company has partnered with prominent cardiologists, primary care physicians, and multi-specialty groups. The IMM acquisition moves the company into yet another market - that of hospital and health system affiliated physicians. This growth has made the company more attractive to managed care payors.''
''In conclusion, we believe that ADVH offers investors the opportunity to own part of an innovative, well-managed, rapidly growing company in a rapidly growing industry. Moreover, the stock's current evaluation of less than one and a half times book value and nine times next year's estimated earnings is a bargain in a market where the S&P 500 sells for six times book and 23 times next year's estimated
earnings. For more information on the company we suggest you begin at their website at advhealth.com.''
SOURCE: Riley Capital Research
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