The Emergence of A New Health-Care Star- Medical Facilities (DR)

  Medical Facilities (DR) is a health-care company with an  unique approach that has grown rapidly over the last 2 years.It was $10 per share a year ago and has grown to it's present price of $17.50 per share.It has a market capitalization of about $550 million.And it has a very interesting and unique business model that should allow easily for future growth.To that end, Medical Facilities just had a good third quarter. All DR facilities are located in U.S.A.
       Third Quarter Results
 Total revenues were up 17% over 2017 to $104 million with organic growth of 7.5% Adjusted EBITDA kept pace with a 17% increase.While income from operations was $17 million ahead by 33% over Q3 2017.Medical Facilities has an unique niche as it does surgical work for hospitals, health-care facilities,doctors and insurance companies.Bigger organizations out-source some of their work to Medical FacilitiesBecause on the one hand it does surgical operations faster than many larger hospitals.On the other hand,it does surgical operations more cheaply and in some cases more complex than what  smaller hospitals can do.In order to do this Medical Facilities has to and does have a very lean and competent operation.
     Nine Month Results
   Revenues increased by 13% to $308 million.Income from operations increased 16% to $49 million.But the big change was the increase in e.p.s. from a loss of $.11 to a gain of $.07 for an increase of 164% for 3 months.And for 9 months e.p.s grew from $.33 to $.39 per share.                          

      Capital Structure
  Medical Facilities has  a market capitalization of $537 million but  has only 31 million shares outstanding.It is a very tightly held stock; approximately 30% -50% of it's share are held by insiders.Consequently in 2017 net income before minority interests were $60 million but $30 million was paid out to minority interests.Net income declared was only $30 million.It is not clear what effect this has on the stock price;it does lower the P/E ratio but it looks like investors buy on the P/E before minority interests are paid.For Qtrade shows the P/E at 18 and Scotiatrade shows it at 25 but if net income is taken before the minority interests the P/E ratio should only be about 8 times earnings.However minority interests certainly do reduce the free cash flow as their net income is taken off the top.This blog believes that it is incumbent on management to lower the minority interest percentage to 33% over time.
             Outlook for 2019
  Medical Facilities will probably have steady growth in revenues and earnings in 2019 as it has a special niche that will only get bigger.However DR needs more investment to put in new facilities.This will require a new secondary equity issue.And the stock price will move ahead slowly as a good chunk of earnings will continue to go to the minority interests.Management needs to ensure that enough new shares in any new secondary issue go to  non-insiders so that the minority interests get a reduced share of their controlling interest.If the return on equity on the new investment matches the existing return or exceeds it then the stock price will rise and insider's share will gradually drop.Look for gradual changes in the capital structure and the share price to move up to $20 with increased earnings.             https://www.zacks.com/    https://www.fool.com/