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PostCog,
Thanks for the message. Yeah I've been holding and continually adding this stock for a very long time. It's one of my favorite small cap healthcare stock.
I don't know how the nationalization will impact MDF but I personally think the Govt will not create a system where MDF will die (unless they bring it to themselves by having bad management and bad operation), because it is a very critical segment.
why not moderate this board?
It seems that one need to post often in this board to stay as moderator. and this board is pretty much dead so I don't see a point trying to keep adding myself as moderator everytime the system kick me out of it due to lack of activity of the board (and lack of my posting volume in this board).
So what stocks do you like these days?
Are you buying anything recently?
Stan
Stan, You were holding this stock when I first came to this website...years ago. Why not moderate this board? :)
No position. I'm not even going to look at anything longterm, healthcare related until after the inevitable nationalization/VAT tax(?) occurs.
MDF posted record earning today.. 9 cents..
and buyback seems to continue..
long and strong..
Stan
Stan: Looks like MDF is slowly making headway.
What's your prognosis? Are they presenting in NYC this week?
Best Regards, Bull
yeah I know what you mean.. but still better than a big loss...
I guess we should count our blessing..
who knows that MDF will go to $1 (if they cant grow and go abck to the declining membership mode again just like it used to be a couple years ago) and then you will be glad that you will be out of MDF stock by then...
I'm banking that more baby boomers will move to florida in the next 5 years or so and that MDF might be able to get more member through HUM..
if only the hurricane and flooding will be reduced in Florida, as that might help as well reduce MER and increase the baby boomers migration to Florida..
Thanks for the wishes..
I hope they will do some buy back or pay some dividend in the next 12-18 months... and I can use that money to buy some other stock as well..
Stan
Stan,
Thanks for your perspective and best of luck on MDF. I am selling very slowly, and you are correct that it is still a profit but not quite the great investment return I had anticipated. Oh well, I do wish you and the other investors all the best.
Mat
Mat, thanks for your thoughts on MDF. I wasn't happy at first when I see the HMO sale (as they will be back to square 1 on growth). but then I tried to remember what was the reason the HMO was built.. for growth as PSN was slowing down (even though it still produce nice cash in Q2 and Q3 each year)
now, since they have all different sorts of strategy to grow the PSN (Careplus and Humana partnership, buying small practices/members etc).. maybe it is best to sell the HMO and back to their core competency which is to operate the PSN..
The HMO hasn't been as successful as we all thought it would be (while continue to rack up losses). While $2K per member sounds cheap but these patient aren't really profitable so I can't really say that HUM get a good deal (maybe if HUM can turn them to be profitable then $2K/member is cheap)
Glad to see the stock is increasing as you unload (meaning that you don't have to unload at a cheap price.. I know you bought at .50 so either way you won).
I haven't been selling but am careful on adding this stock as like you said, it has been dead money for the last couple years...
Hope you will leave some shares in case the company came back to become the cash cow it used to be and start buying back stock and maybe even pay dividend someday in the next 5 years..
Thanks for the best wishes Mat,
Stan
Stanu,
The whole reason I liked MDF was the solid cash cow with Humana and the fact they were diversifying with the HMO. I thought the HMO timing was good and if they could get past break-even, the two areas of business would be synergistic. Mike Early had said early on that a mature HMO would value members at $10K, so since MDF sold for $2K, sounds like Humana got a bargain. Yes, I know it was a load stone on MDF and probably was the best thing to do if they could never make it profitable, but it was a huge wasted investment over the last few years. I am slowly unloading my position, although I recognize the clamoring that MDF is worth more now because of the solid cash flow. That may be true, but it is dependent completely on Humana and I don't see alot of growth opportunity down the road. I hope I am wrong, but I will find other places for my money. MDF was ok for me since I started buying at .50, but it has been dead money for far too long. Best of luck to you.
Mat
Metropolitan Health Networks Reports 2008 Second Quarter Results
Tuesday August 5, 7:00 am ET
Company Delivers 91% Increase in Earnings for First Half of 2008 Over 2007
WEST PALM BEACH, Fla., Aug. 5 /PRNewswire-FirstCall/ -- Metropolitan Health Networks, Inc. (Amex: MDF - News), a leading provider of healthcare services in Florida, today announced financial results for the six months and quarter ended June 30, 2008.
On July 28, 2008 the company reported that in the three months ended June 30, 2008, the company's Medicare Advantage HMO and its PSN realized retroactive mid-year Medicare Risk Adjustment ("MRA") premium increases totaling $6.6 million resulting from improved risk scores. Approximately half of this increase applied to premiums earned in the first half of 2008. As a result, the retroactive premium payments for the first quarter of 2008 were higher than the company's estimate of $500,000 at March 31, 2008, and had a significant impact in the second quarter of 2008 on both revenue and the medical expense ratio ("MER"). On a segment basis, the retroactive mid-year premium increases were $5.8 million and $848,000 for the PSN and HMO, respectively.
Six Months Year to Date Financial Highlights:
For the six months ended June 30, 2008, the company's revenue totaled $158.2 million compared to $138 million in the prior year period, an increase of 14.6%. Net income was $3.4 million compared to $1.8 million for the same period of 2007, an increase of 91%. Fully diluted earnings per share were $0.06 and $0.03 for the six months ended June 30, 2008 and 2007, respectively.
Year to date results for the company's core PSN business includes a segment gain of $13.6 million before allocated overhead and income taxes. This compares to a $13.1 million segment gain before allocated overhead and income taxes in the prior year period. The company's HMO realized a year to date segment loss of $3.3 million before allocated overhead and income taxes, which compares to a segment loss of $5.6 million before allocated overhead and income taxes for the same period last year. As discussed below, the Company has entered into a definitive agreement for the sale of its HMO. Corporate overhead for the first six months of 2008 totaled $4.9 million compared to $4.5 million for the same period in 2007.
Second Quarter Financial Highlights:
The company recognized revenue of $82.2 million for the second quarter as compared to $69.9 million in the 2007 second-quarter, a 17.6% increase. Net income for the 2008-second quarter was $3.7 million or $0.07 per share, diluted as compared to $1.5 million or $0.03 per share, diluted for the same quarter last year.
The company's PSN realized a segment gain of $8.9 million before allocated overhead and income taxes in the 2008 second-quarter. This compares to a segment gain of $6.6 million before allocated overhead and income taxes in the prior year's second quarter. The company's HMO realized a segment loss of $690,000 before allocated overhead and income taxes, which compares to a segment loss of $1.7 million before allocated overhead and income taxes in the second quarter of 2007. Corporate overhead for the second quarter totaled $2.3 million in both 2008 and 2007.
Customer Information:
The number of Medicare Advantage customers increased by 2,700 between June 2007 and June 2008 to 33,100 as of June 30, 2008. Total customers at June 30, 2008 for each of the Company's segments were approximately 25,700 for the core PSN business and 7,400 for the Medicare Advantage HMO launched mid-year 2005. Customer months, the combined total customers for each month of the measurement period, increased to 99,400 in the second quarter of 2008, up from 91,800 in the 2007 period.
Medical Expense Ratio Highlights:
The company's consolidated MER decreased from 87.9% in the first half of 2007 to 87.7% in the first six months of 2008. The MER for the PSN business segment was 86.9% in the first six months of both 2008 and 2007. The HMO's MER decreased to 90.5% in the six months ended Junes 30, 2008 compared to 92.4% for the same period in 2007.
Balance Sheet Highlights:
Cash and equivalents at June 30, 2008 totaled $37.5 million as compared to $38.7 million at December 31, 2007. The company had a working capital surplus that increased to approximately $35.1 million at quarter end, compared to a surplus of approximately $29.2 million as of December 31, 2007. The mid-year adjustments totaling approximately $6.6 million discussed above were accrued at June 30 and subsequently received in July. The company has no outstanding debt and stockholders' equity totaled $42.4 million at June 30, 2008.
Sale of the HMO:
As announced on June 30, the company is selling its HMO to Humana for an estimated $14 million, the transaction expected to close by October 1, 2008. In the transaction, the company is retaining the opportunity to provide care for the HMO's customers, today numbering about 7,400. Metropolitan Health Networks is transitioning the HMO's business into its core PSN, or Provider Service Network, business and is significantly expanding its relationship and opportunity with Humana in the 13 counties in which the HMO operates. The company expects to work in conjunction with Humana in exploring new opportunities in additional counties.
In the course of analyzing the proposed sale of the HMO, the company developed a range of projections regarding its future operating performance after giving effect to the proposed sale of the HMO and Metropolitan's entry into new risk provider agreements with Humana. Based upon these projections, the company believes that the sale of the HMO and the new risk provider agreements offer it an opportunity to immediately improve upon its potential to generate positive income from operations in future periods. Most notably, the company projects that by utilizing Humana's existing contracts with various service providers, the new provider risk arrangements will reduce the cost of providing medical services. It is also believed that the reduced revenue per customer per month associated with the new provider risk arrangements will be more than offset by projected medical cost savings, elimination of a significant portion of the HMO sales and administrative costs, and reductions in corporate overhead, which, the company expects, should enhance its potential to generate income from operations.
Michael Earley, Chairman and Chief Executive Officer of Metropolitan Health Networks, Inc., commented, "We are very pleased with our 2008 first half report. The mid-year risk adjustment payments brought our premium levels to expected levels that are more reflective of our continuing commitment to proper risk coding. The MER performance in our core PSN business continues to be very good and the MER of the HMO continues to improve, as we continue to bring down our overhead spending."
Continuing, Earley noted, "2008 is shaping up to be a year of transformation for Metropolitan as we move forward with the sale to Humana of our HMO and the conversion its 7,400 customers into our PSN customers. The sale expands our Humana-contracted market from 5 Florida counties to 18, significantly increasing the potential for growth in both of our organizations. We are once again refocusing our business, our expertise and our resources on our core competencies while expanding our market area and our opportunities. As our balance sheet continues to strengthen it will provide the resources necessary to take advantage of this new footprint."
I hope they will reduce the dilution (stock compensation), and just use cash that they have to pay bonus and let them buy stock in the open market if they wanted to.
MDF balance sheet is solid, but I feel that they need to do something with it (other than buyback or dividend). something that can improve their eficiency and revenue and profit but not as costly, risky and draining as the HMO...
what are the alternatives?
Any thoughts on the HMO sale? what is your take of MDF future without the HMO... what do you think MDF stock price should worth?
Stan
Horrible results and not at all what I was expecting. Hopefully the CC will provide some hope for the future. MDF continues to plod along, but can't seem to show consistent profitability. I expect MDF will head down to $2 and below for the next 3 months. Depressing that it is not going anywhere positive soon.
Mat
MDF post $338K loss in Q108 and 7400 HMO member.
Somewhat dissapointing result but not surprising.
On the positive side:
- total customer increased 2,700 to 33,000 (mainly form HMO increase)
- HMO losses dropped to 2.7M from 3.9M. and the 2.7M loss includes 1.4M advertising expense. should be able to break even within 12 months or so IMO (after the next open enrollment period)
- Cash up to 40.7M from 38.7M with still 0 debt
- HMO MER dropped to 90.5% from 95.9%
- They expected PSN MER to improve as we move into the year
On a negative side:
- Overall MER increase to 90% from 88.4%, due to increased hospital admissions and higher than normal catastrophic cases
- decline in investment earning due to decline in financial markets (will be interesting on what kind of investment do they have, besides the basic short term FDIC insured type of investment, if they have any. I am hoping they don't)
- MDF post $338K loss in Q108 vs $228K gain last year
- HMO membership takes a long time to reach 10,000 members (now at 7,400)
Not sure what the stock price will do today with this mixed result but hoping within 12 months or so they have a clear picture whether they can be profitable in overall (and breakeven in HMO). Going into this year, PSN performance definitly need to improve from Q108 performance.
Stan
Has anyone seen the 10K? I keep checking Edgar and it doesn't appear to be available yet, but maybe I am doing something wrong. Seems strange that it would not be available yet.
Mat
i'm guessing hmo breakeven rate will be 10,000 members and we won't see 10,000 members before the end of 2009
still ok though
slow but sure..
stan
Just finished listening to the MDF call, with the following notes:
Still working to increase PSN through new primary care affiliates, Care Plus and other avenues
Holding cash balance (not including $13M restricted)for business growth opportunities
Recently invested $2M in strategic business transactions
Callers asking questions were particularly upbeat and complimentary
Still indicate 10,000 HMO Members as an important milestone in scale and profitability
Indicated that trend in decreased costs is expected to be lasting with reduction of actuary costs.
One caller estimated a .30 annual PSN net income, .50 cash, and $30-50M (.6 - $1) value of HMO indicating an overall value estimate of MDF north of $4. Earley did not answer the estimate but indicated that they will focus on the business and expect market will value accordingly
Indicated the advertising expenditures have been constant at ~$3M/yr and should continue at this rate. Most spent in fourth and first quarters.
Indicated the care plus efforts added 76 members through December, but very early in this effort.
Overall good information and bodes well for the future of MDF.
Mat
Excellent results. The net income was definitely better than I had hoped for and the growing cash reserve is nice. The HMO expense ratios are headed in the right direction, but still need work and the HMO member growth is slower than I would hope since it will be hard-pressed to reach break-even at 7500 members. Couldn't have asked for a much better result and I am certainly satisfied with the investment.
Mat
MDF post strong Q4 (0.05) and 2007 result (0.11) Revenue up 22%
I'm bullish again on this stock (though have always been long even when I'm bearish on this one)
not sure what the stock price do today. usually after earning they dropped but I won't be surprised if it goes up today after a strong result (even if the general market is down)
Milder flu in florida might help their net income to be higher.
Stan
-------------------------------------
Metropolitan Health Networks Reports 2007 Results of Operations
Tuesday March 4, 7:00 am ET
Net Income Improves to $5.9 Million on 22% Year over Year Revenue Growth
WEST PALM BEACH, Fla.--(BUSINESS WIRE)--Metropolitan Health Networks, Inc. (AMEX:MDF - News), a leading provider of healthcare services in Florida, today announced the financial results for their fourth quarter and year ended December 31, 2007.
Total revenue for 2007 increased 22% to $277.6 million as compared to $228.2 million for 2006. Net income for the year amounted to $5.9 million or $0.12 per basic share and $0.11 per diluted share as compared to $473,000 or $0.01 per basic and diluted share in 2006. 2007 results included a segment profit before allocated overhead and income taxes for the Company’s core PSN business segment of $29.2 million and a segment loss before allocated overhead and income taxes for the Company’s Medicare Advantage HMO of $10.5 million. Corporate overhead totaled $9.3 million.
Revenue for the fourth quarter of 2007 increased 25% to $69.9 million as compared to $55.7 million for the same period of 2006. Net income for the quarter was $2.6 million or $0.05 per basic and diluted share as compared to a net loss of $2.7 million, or $0.05 per basic and diluted share for the same period in 2006. Fourth quarter 2007 results included a segment profit before allocated overhead and income taxes for the Company’s core PSN business of $7.9 million and a segment loss before allocated overhead and income taxes of $1.8 million for the HMO. Corporate overhead was $2.1 million in the quarter.
Year over year, the company reported a 67% increase in cash and equivalents to $38.7 million at December 31, 2007. Working capital increased by $9.7 million, or 49%, in 2007 to a total of $29.2 million at year-end. Shareholders’ equity improved from $30.9 million at December 31, 2006 to $38.3 million at December 31, 2007, and the company has no long-term debt.
Metropolitan served a total of 31,600 Medicare Advantage customers in December 2007 with 6,200 enrolled in the company’s HMO and 25,400 being served by the PSN segment. These numbers compare to total December 2006 customers of 29,400, with 3,800 and 25,600 customers for the HMO and PSN segments, respectively.
Michael Earley, Chairman and Chief Executive Officer of Metropolitan Health Networks, commented, “2007 was a year of marked improvement in the financial results for Metropolitan. Our core PSN business, accounting for 80.2% of our 2007 revenues, continues to perform as well as it ever has in terms of profitability and cash flow. These results were impacted to a lesser extent in 2007 by improvement in the management of medical expenses and operational growth at METCARE Health Plans, Inc., our own Medicare Advantage HMO, and its AdvantageCaresm product. Our consolidated medical expense ratio was 86.7% in 2007, 85.2% in the PSN and 92.9% in the HMO. This represents an improvement in the PSN medical expense ratio of 3.1% and in the HMO of approximately 9.6% versus 2006. We believe that the changes undertaken during 2007 will continue to improve results as we move through 2008.”
Earley continued, “The December customer numbers noted above do not include the new members recruited during the open enrollment period that began on November 15, 2007. We served a total of 32,800 customers in January 2008, with 6,900 in our HMO and 25,900 in the PSN. Based on our current sales activity we anticipate that the April 1, 2008 enrollment in our HMO will reach approximately 7,500 customers. This projected enrollment takes into account an estimate of future disenrollments and cancellations that are caused by a variety of reasons. The current Medicare Advantage open enrollment extends through March 31, 2008.”
Looking to the future, Earley stated, “We continue to work very hard to maintain and to improve the performance of our core PSN business. We see opportunities to grow that business and are pursuing them. With regard to the HMO, we are continuing to pursue our strategy of taking this business and its products to Florida’s underserved non-urban markets, but we are aggressively challenging and changing our medical management strategies. In addition to medical expenses, we are working to reduce our overall cost structure and make our marketing approach more efficient. We look forward to reporting our progress throughout 2008
Thanks Bob :) Appreciate ur thoughts on the story. Cheers
Still have a few thousand shares but have been waiting for MDF to move to profitability in it's HMO.
The analysis here was very detailed but the bottom line is that MDF is a stock that needs to show consistent increases in profitability and eps like any other stock to impress new investors and drive up the share price.
The HMO has achieved the target enrollment that we thought would equal profitability or at least breakeven many months ago. HMO profits are still elusive and that is key. MDF needs to control costs and get beyond the "startup" phase when heavy advertising is needed to recruit new members. Their operations and costs were complicated by the decision to expand beyond the original 5 or 6 counties. Obviously this was a long run decision that will hopefully benefit MDF over time but it did delay profitability.
I am uncertain about when MDF will break thru. I intend to hold what I have but will not invest more until I see signs that they have a good handle on their HMO operations.
Bobwins
Hi Bob, are you still following MDF? here's a nice read that I came across;
10/23/2007 10:42:00 AM MDF ($2.43) <Metropolitan Health Networks > by bentley883 Rating 6 (9 users)
Description:
OVERVIEW: With the passing of about a year since my last write-up on MDF and after some disappointing results followed by significant operational & management changes, which give me confidence that my original thesis on the shares remains intact, I thought it was timely to provide a comprehensive update and reiterate my favorable opinion on the stock. I continue to believe that the shares offer investors an opportunity to buy a good business (defined by a high ROIC and FCF dynamics) with improved management at only about two-thirds or less its of intrinsic value with a free call option on future growth from a new value enhancing business, some near-term catalysts to unlock shareholder value and a reasonably healthy margin of safety. The current opportunity in the shares is due to the current losses/difficulties that the company has experienced in opening up a new related and potentially more valuable business. The current poor economics associated with this start-up effort is depressing overall corporate results and clouding the very favorable economics of its core business. Thus, for those investors who are willing to invest the time to dissect the company's operations and look at some of the valuable assets on its balance sheet they will find a company whose sum of the parts is worth significantly more than the current stock price. Given the favorable cash flow dynamics associated with the company's PSN business, its healthy cash rich/no debt balance sheet, the private market value of some of its assets, I believe that MDF would be an excellent candidate for either a private equity firm or other entity to acquire the company.
For those unfamiliar with MDF, the company is a health care provider operating in a number of counties in South Florida with two operating divisions: 1) a slow growth high FCF provider service network (PSN division) that is contracted to provide medical services for Humana Medicare Advantage members, and 2) a growing self-funded "green fields" HMO business (unprofitable currently) that is operating in a number of the surrounding South Florida counties. If you are interested in a more detailed understanding, you can refer back to prior VIC postings on 11/15/06, 3/11/05 and 4/11/04 as well as some detailed Q&A updates.
The following are some of the key statistics for the company:
Share price: $2.43
52 Week Range: $3.40 - $1.62
Shares Outstanding: 52.0M
Average Monthly Volume: 259,300
Market Capitalization: $126M
Enterprise Value: $97M
Cash/Per Share: $29.3M / $0.56
Debt: $0
TTM Sales: $254.6M
TTM EPS: $0.03
TTM FCF: $6.9M
THE SUM OF THE PIECES MATH SUGGESTS A SIGNIFICANTLY HIGHER VALUATION IS WARRENTED: The simple math to support my belief that the shares are significantly undervalued is as follows. By one measure, valuing the company's +20% ROIC high FCF core provider service network (PSN) at only a modest 10x LTM FCF and adding the $0.56 in cash and an NOL of $0.12, yields a price of about $3.60 per share. Using recent M&A transactions which point to a private market value for the PSN of 8-9x EBITDA, translates into a valuation of about $3.86-$4.26 per share. Thus, this points to the fact that MDF's PSN business alone, coupled with the associated cash and NOL on the company's books, provides upside potential in the shares of about 50%-70% as well as providing a meaningful margin of safety and downside protection for investors.
However, importantly, this valuation accords no value (although one could argue negative valuation) to the company's efforts to launch a more valuable HMO business. Thus, investors are getting this future growth opportunity for free (a free call option). As I stated in previous postings, HMO enrollees are more highly valued in both the public and private markets due to the ownership of the customer and are valued at about $4,000-$5,000 per member, while those business with scale valued closer to $5,000-$7,000 per member (see 11/15/06 posting for more detail on this). Thus for argument sake, assuming for a moment that MDF decides to just close this business and sell off its membership (not my expectations) and using the June quarter numbers (I expect some modest growth in the September quarter and more healthy growth the following two quarters) and the lower $4,000-$5,000 valuation/member, this would add an additional $0.40-$0.50 to the prior analysis.
A summary of the math is a follows:
Metropolitan Health Networks
Sum Of The Parts Analysis
PSN Business using TTM FCF:
TTM FCF: $24.48M pre tax / $15.18M net
Value @ 10x FCF multiple: $151.8M
Shares Outstanding: 52.0M
Value Per Share: $2.92
PSN Business using private market values:
TTM EDITDA: $20.7M
Shares Outstanding: 52.0M
Value Assuming 8x Multiple: $3.18
Value Assuming 9x Multiple: $3.58
HMO Business:
Private Market Value Per Enrollee: $4,500
Current Number Of Enrollees: 5,100
Estimated Value Of Current Enrollees: $22.95M
Shares Outstanding: 52.0M
Value Per Share: $0.44
Net Cash Value:
Net Cash: $29.3M
Shares Outstanding: 52.0M
Value Per Share: $0.56
NOL Value:
NOL: $6.1M
Value Per Share: $0.12
In conclusion, using the most conservative sum of the parts analysis for the PSN business and ascribing NO value to the HMO business leads to a $3.60 value (+50% upside) for the company. On the other hand, a more generous valuation (using a private market value for the PSN & HMO businesses) translates into a value in excess of $4.50 (+80% upside). I will let you pick what metrics is most appropriate. However, by any measure there is significant upside in the share price.
USING VERY CONSERVATIVE ASSUMPTIONS, THE SHARES OFFER A HEALTHY MARGIN OF SAFETY: A prerequisite that any good value investor wants, and the shares of MDF offer, is a reasonable margin of safety. The margin of safety is found in MDF's +20% ROIC healthy FCF PSN business, coupled with the cash and NOL assets on its balance sheet. Assuming for a moment that the HMO effort is a failure and MDF needs to exit the business. Given that the company has been self funding this operation and it have very little fixed assets, it could close it down relatively easy and with little costs. They could then sell off the members to one of the many competitors trying to increase the ranks of enrollees in their own plan. This would help MDF grow their cash position by some amount (as discussed previously) and, removing a business that is losing money, leave MDF with a more profitable overall business. However, if I don't consider any gain from selling off its HMO members, I submit the shares of MDF still have a healthy margin of safety. Noteworthy, this is even true during a seasonal weak period in the basic business. In order to be conservative, I looked back at MDF's PSN business over the last few years to find the TTM period when these operations recorded the weakest operating results (i.e. bad cough & flu season and/or poor operations). I then assumed a FCF multiple of only 8x this stream of earnings and added back only the cash; ascribing no value to the NOL. Given all of these conservative factors (a FCF multiple on the PSN business of only 8x's and no value to the HMO members or the NOL), I get a value of $2.10 per share. While I would never use the words worse case, I think you would agree that my assumptions are very conservative. While I would not say that the stock would not trade under this level for a short period due to supply demand imbalances (which it has), I would submit that this is a reasonable downside. As $2.10 per share only represents about 14% downside, I would submit that at current levels there is a reasonable healthy margin of safety in the shares.
Metropolitan Health Networks
Margin of Safety Analysis
PSN Business using TTM FCF:
Trough TTM FCF: $16.1M pre tax / $9.99M net
Value @ 8x FCF multiple: $79.9M
Shares Outstanding: 52.0M
Value Per Share: $1.54
Net Cash Value:
Net Cash: $29.3M
Shares Outstanding: 52.0M
Value Per Share: $0.56
TOTAL VALUE PER SHARE: $2.10
Note: Assumes no value for HMO members or NOL.
KEY POINTS & CATALYSTS: The following are some update comments that underlie my confidence in the story at this time and/or should provide a near-term future catalyst:
-- NEW MANAGEMENT DRIVES MEANINGFUL OPERATIONAL IMPROVEMENTS: In the last few quarters there have been a couple of changes to senior management that in my opinion has improved the company's operating capabilities. Notable in this regard are the additions of: Bob Sabo, who joined the company at the end of 2006 as the new CFO, the appointment of Joe Guethon to run the PSN business and the addition of Dan McCarthy to oversea the problem plagued HMO operations. In my opinion the addition of each individual has helped upgrade the management and operational capabilities of the organization and brought meaningful change to how the company is managed. Management has used the disappointment experienced in the December quarter as a catalyst for change by reviewing all areas of operations with an eye towards improving costs. A number of actions are already in place focused on reducing overall costs in both the PSN and HMO operations, more efficiently growing membership and improving the company's all important medical expense ratio (MER) in each division. Some of the changes are focused on such things as proper coding, improved risk scoring and putting in place procedures to discourage "needless" referrals. As a portion of these change rolled in we saw some improvement in the March and June quarters, with further progress likely in the September period. Any improvement in profitability in the PSN operations and a reduction in the loss and breakeven point in the HMO business would likely be a catalyst to the share price.
-- COMPETITIVE CHANGES OPEN UP NEW GROWTH OPPORTUNITIES: In the last few quarters there have been some changes in the competitive environment that in my opinion should open up some new doors for growth in membership and improvement in profitability. Two things are most notable in this regard. Recently one of the company's HMO competitors, America's Health Choice, was dissolved and its members assigned to another plan. While MDF was not the assigned plan, all other HMO plans have a time where they could compete for these members. My understanding is that MDF has been successful in its efforts in winning over a small portion for its plan. This coming at a time when the open enrollment window was closed has helped it grow its membership modestly during a traditional slow enrollment period (and during a time it has been focused on reducing its HMO cost structure), will be viewed as good news when the September results are released and should translate into a further reduction in the losses from this division. Any improvement in the financial operations of the HMO division should be another catalyst for the stock. Second, another of the company's competitors is in major trouble. Back in the early part of the year the state of Florida moved to close down on of MDF's largest HMO competitive plans. This plan (labeled Any, Any Any) from Universal Health Care has about 70,000 members and its growth was one of the reasons that MDF missed its enrollment goals in the last October-March open enrollment window. While Universal is attempting to fight the state in court, it is losing doctors and members and most importantly, is restricted from signing up new members in the current open enrollment window that began October 1st. If the state is successful in closing this plan down this would create a potential jump ball opportunity for its competitors, including MDF, to win over these members.
-- SUCCESS IN GROWING HMO MEMBERSHIP DURING THE CURRECT OPEN ENROLLMENT WINDOW COULD BE A MAJOR CATALYST FOR THE SHARES: As stated previously, the new open enrollment window for signing up new HMO enrollees began October 1st, and lasts through March. Success in increasing the number of HMO members over the next two quarters could be a major catalyst to move the share price higher. My expectation is that the company will be successful in driving the number of HMO customers from the 5,100 level at the end of the June quarter at least to the 6,000-7,000 level that management had hoped for during the last open enrollment window last year. With managements focus during this time on reducing the cost structure and the breakeven point for this business, I believe that it is highly possible that the company will exit this open enrollment window at or very close to profitability. Achieving profitability in the HOM business would likely be a major catalyst to the shares. Why should I have optimism that management will reach this milestone when it was unsuccessful last year? A combination of factors that are different from a year earlier leads me to this belief, including: new management, a more seasoned marketing approach (i.e. they have learned from last years mistakes and what worked well), a focus on cost cutting and the inability of the company's most aggressive competitor last year to sign up new members while another competitor was dissolved by the state authorities.
-- RECENT M&A ACTIVITY SUPPORTS MY VALUATION ASSUMPTIONS: Recently there have been a couple of acquisitions that reinforce the private market assumptions that I have outlined above. In August, in somewhat of an eye opening announcement in the industry, publicly held Healthspring acquired Miami based Leon Medical Centers, an HMO with about 25,700 members in a cash and stock transaction that values each enrollee at more that $15,000. While there is a premium accorded HMO organizations with scale, this price is well above the range that most industry observers had expected for these types of acquisitions. Clearly, this supports the $4,000-$5,000 per member estimate I have used in my previous sum of the parts valuation analysis and may in fact show that there is significant upside to my estimate if MDF is successful in growing this business to larger scale. Second, recently publicly traded Continucare Corp. announced the acquisition of Miami Dade Health Centers, a health care service provider similar to MDF's PSN division, but smaller in scale. Notable is that management said the acquisition price was at about a 9x EBITDA multiple. This supports my 8-9x EBITDA multiple assumption for MDF's PSN division in my preceding sum of the parts analysis, and may be conservative given MDF's greater scale.
Disclosure: The comments on this stock, and any other I discuss with VIC members on this site, represent my own opinion on the stock which are based on my own analysis and independent research from multiple sources that I believe are reliable. In keeping with the spirit of the club, I suggest others should do their own research before making any investment decisions and welcome any feedback or opinions from other VIC members. Consistent with my investment opinion, my firm has had and may continue to have a long position in the shares of MDF.
Catalyst:
1)An increase in HMO enrollment in the seasonally slow September quarter from market share gains associated with the closing of a major competitor. 2)Success in driving a meaningful increase in HMO enrollment during the current open enrollment window over next two quarters. 3)Cost reduction and operational improvements resulting in a lower medical expense ratio (MER) in both divisions. 4)Reducing the losses from the HMO division over the next two quarters and moving this business closer to profitability. 5)The State of Florida completing its efforts to shut down competitor Universal Health Care, and the possibility that its 70,000 HMO members could be up for grabs.
Mat, I kind of feel the same way. I did say in yahoo board that I agree with your assessment. that we think based on the information available it seems that MDF is being reactive and Q2 will be breakeven at best if not losing money. so I'm positively surprised. I did mention that I still have small hope that they will still post 2-3 cents and that the move is proactive. I'm glad that my small hope turns out to be reality.
And yes, MDF is no Yankees. MDF doesn't have all the luxury (money and star players) that the Yankees has (and for Yankees not to win is a big dissapointment for them, the money that they spend, and the yankees fans)
MDF cash balance isn't too bad though. though soon if they continue to grow their HMO, all the cash will be restricted for HMO pupose.
I'm still hopeful that MDF will grow to become a big/bigger company. Maybe they are not going to be as big as HUM which iw 100 times larger than MDF (but then again HUM several years ago was 1/10 smaller (in terms of market cap) than today. Maybe MDF can be as big as Healthspring (HS) in the next 7-10 years which has market cap 10 times of MDF.
Stan
Admitedly when MDF announced the closure of the centers prior to the 10Q I was thinking they might be headed south and I might be eating crow with some of the critics. I feared a poor quarter with an apologetic CC stating they were doing all they could do and look at the cost cutting move they had just taken. Those were my fears, but I was pleasantly surprised with the innovation and multiple prong strategy I heard in the CC. Even the closures made sense and they were coupled with other strategies that made even more sense. I realize some believe MDF could do better with another CEO at the helm, but I have been impressed by ME.
Some have made an analogy to the Yankees, but I think that is unrealistic based upon the small size of MDF. A better analogy would either be Oakland or Tampa Bay. The MDF team is still trying to develop a winning team and in another year or so we will see if the "players" they are developing can hack it in the major leagues. Sometimes experience is over-rated and a quality manager can be successful. Only time will tell.
Mat
Thanks Stockhawk, good guess of 3 cents Q2 EPS.
I hope your patience will be paid off. I know that 4 years is a long time alraedy but I can start feeling that the HMO is having more than 50% chance to be successful as of Q2 result (IMO). Just barely tipped the scale on the positive side.
I've been long with MDF (not in and out though) for about the same time as you are.
Keep the faith and be well!
Stan
Learn from other's mistake 2: American Health Choice
Seems solid and convincing, but I guess we can't judge the book "only" by its cover.
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AHC Mission Statement
America’s Health Choice Medical Plans, Inc. will provide the community with a choice in the delivery of affordable and accessible medical services for senior citizens and all other Medicare eligibles.
As a managed care orginization focused on wellness and disease prevention, America’s Health Choice Medical Plans, Inc. is committed to delivering quality medical health care through the coordination of properly planned, managed and utilized medical services. With respect, compassion, and consideration, our physicians and clinicians will deliver appropriate health care to our patients, providing for all of their health care needs. We are dedicated to working in partnership with our patients, recognizing and supporting each other as a “total person” with integrated needs of mind, body and spirit.
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Americas Health Choice Medical Plans, Inc. is a Florida Medicare Advantage plan that was formed in July 2000. We are the longest serving Medicare Advantage HMO in the Treasure Coast.
America’s Health Choice Medical Plans, Inc. emphasizes prevention, early disease detection, and treatment. Currently we serve more than 11,000 Medicare Advantage (HMO) members. Our network includes 14 hospitals, 40 primary care physicians and 1085 specialists in Broward, Brevard, Indian River, St. Lucie, Martin, Okeechobee, and Palm Beach Counties We also offer a state wide prescription drug plan.
America's Health Choice is focused on providing access to affordable, quality healthcare for those eligible for medicare. As a community leader our work includes ongoing outreach programs that endeavor to improve the lives of not just our members but the community at large. As an employer we foster the belief that continued training and education of our employees is the hallmark of a successful Managed Care Organization
Learn from other's mistake: American Health Choice
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Official letter from CMS
http://www.ahcmp.net/SecureHorizons.pdf
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Article about AHC contract being terminated (first one to be terminated)
Medicare Terminates Medicare Advantage Company’s Contract
By Larry Lipman | Friday, July 20, 2007, 11:22 AM
Warning of an “immediate and serious threat to the health of their members,” Medicare has terminated its contract with a Vero Beach managed care company that covered 12,000 beneficiaries in a seven county area in Central and South Florida.
The termination of the contract with American Health Choice Medical Plan Inc., went into affect at midnight and was announced this morning by Abby Block, director of the Center for Beneficiary Choices, which oversees the private managed care Medicare Advantage program.
Beneficiaries who had been enrolled in the AHC plan were immediately transferred to a similar managed care plan offered by SecureHorizons, a subsidiary of UnitedHealthcare.
All health benefits previously covered by the ACH plan will be covered by the SecureHorizons plan, Block said, and beneficiaries should not encounter any gaps in their health care.
“We think the beneficiaries are in very good shape,” Block said.
Beneficiaries were mailed an overnight letter from SecureHorizons informing them of the change, Block said. In addition, the company plans to hold a series of town hall meetings with beneficiaries next week.
Among the health concerns raised by Medicare investigators who conducted a surprise inspection a few weeks ago were “serious delays” in making referrals for treatment, mistakes in medication, failure to provide beneficiaries with access to specialists and substandard medical care provided in the company-run clinics, Block said.
Jason Mankiewicz, a company spokesman, said it would be releasing a statement later today but declined to comment.
AHC received a contract from Medicare under the previous Medicare Plus Choice program in July 2000 but soon became a concern for the agency. The company received unfavorable audits in 2004 and 2005, but Block said the problems encountered were primarily related to financial, rather than health care, issues.
In April, Medicare officials informed the company that it would not be allowed to continue participating in the Medicare Advantage program next year. That decision had been under administrative appeal.
Since then, Block said Medicare had received reports from people working for the company that raised alarms. The agency dispatched field investigators a few weeks ago who made an unannounced visit to the company to review its records.
Medicare is not aware that any beneficiaries suffered serious health problems as a result of the company’s action, Block said.
Medicare’s decision to terminate the company’s contract for health care reasons cannot be appealed, but the company could seek to overturn the agency’s action in federal court. As of this morning, Block said the company had not indicated it would seek court action.
Block said Medicare is continuing to investigate the company’s financial affairs, but would not say whether any criminal charges are anticipated.
SecureHorizons was chosen because it covers the area covered by AHC and its benefits — including a zero premium — were closest to those provided by AHC, Block said.
Beneficiaries have the option of switching to another company or returning to the traditional Medicare program within 90 days.
Of the roughly 12,000 AHC beneficiaries, 640 were enrolled in an AHC program that provided a partial rebate of Medicare Part B premiums and will no longer receive that benefit.
AHC is the first company Medicare has terminated for health care concerns since the Medicare Advantage program was created as part of the 2003 Medicare Modernization Act.
Nice posts you two. I was praying all along they would post .03 and I got my wish. I've always thought that this company would prosper someday and I also knew it would not come over night. Its a very solid business plan and I'm pleased with the direction they are headed in. I've been in and out of MDF (mostly in) for 4 years now.
I'm glad to see that MDF is proactive in a lot of their action/strategy and trying to make the best of what they get.
I agree with what Mat said. Nice earning call recap by the way. I'm getting more comfortable with MDF progress and direction. I'm gaining more confident that Mike Earley can actually can and will lead MDF to be a successful company.
Some of the things that I like from the Q2 result and the earning call:
- Profit. (I promised to be dancing on my way back home if they post profit and I will. i.e. from the office building to the parking lot)
- Cash balance continue to increase (and will be kept in reserve vs doing dividend or buyback). notice how the cash locked/restricted for HMO grow so fast (more than double to $17.8M and more than half of their total cash). that is another thing that I wanted to point out. controlled growth is good (I don't want to see them issue more shares to comply with the reserve requirement)
- MER is improving (looks like they know what it takes to lower MER)
- Payment per member is still increasing (nice revenue growth and give MDF more room to work with and to give nice and competitive plans)
- Addition of another county for the HMO
- Selling 2 non profitable (and declining member base) location
- Using $900K to buy one new location which already has 1000+ members. and if there are more opportunity like this present itself, MDF might use some of their cash to buy them.
- Some of AHC member might sign up with MDF (350 and counting)
- HUM's careplus division might/will give MDF members to service (hopefully solving the PSN declining memebrship issue)
- 6000-7000 HMO members could be breakeven but they are aiming for 10,000 members to have a good and sustainable business (they are aiming higher than just the minimum and they feel this is achievable. I just hope they didn't mean to say with 10,000 they will be just about break even)
- Still no guidance (and I support that) but I sense more enthusiasm and confidence from the management in this earning call (jmho on this one).
I don't have many things that I dislike (that haven't been mentioned or addressed by MDF themselves so I'll save this dislike list for other time)
I still don't think they will be successful overnight (and they never claim to be so), but all the progress indicates that they are moving towards the right way to success.
Two quarters doesn't indicate a trend, but do it again for another quarter or two and that will be 4 quarters and that might be closer to a trend :) just kidding.. I know that for Q4 and Q1 cost will increase (both marketing cost and utilization).
All the best for all longs.
And last but not least.. Congratulation MDF team for delivering a great and comfortable second quarter result!
Be Well,
Stan
MDF Conference Call Highlights
Listening to the conference call, I am very reassured. Good quarter, but the CC was even more encouraging. Highlights: Big opportunity to attract former AHC (7,000) members over next 60 days with 350 (2/3 captured in current HMO #) applications in last 2.5 weeks. Current HMO membership of 5350 (up 200 from June CMS report). PSN may also have opportunity since AHC had ~3000 members in two Humana counties served by MDF for Humana.
Although closing some areas, but opening 2 new centers in Daytona market. One was a historically well-run practice where the principal was retiring. Probably some costs, but sounds like a decent investment. MDF believes they can grow and improve profitability. Other is a new office in attractive area.
Limiting HMO growth, but still adding a single county (Collier?) for 2008 (this should help contain costs somewhat)
Expanding relationship with Humana with "Care Plus HMO" in 9 counties in South Kent Fl. to increase PSN coverage (6 of the counties are new for PSN). Humana has decided not to fold this into their Humana business. MDF hopes to reverse PSN decreases in membership through this contract. MDF challenge is to develop the networks to support Humana
Good logic on closed PSN center discussed
Use of cash: Wishes to reserve for business growth
To provide stability and scale the MDF goal is to drive HMO to 10,000 members
Continuing effort to adjust risk scores and believes there is still significant opportunity to improve premium
Good discusion on the results of last year's HMO open season and fact that it was not satisfactory (increase in 2K) due to competitors offers. Hopes to apply lessons from last open season and see better results this open season.
Very positive CC and bodes well for MDF over the next year. I did not hear any reasons to sell at this point and considerable opportunities going forward.
Mat
IMO this is a screaming buy right now. I've got 3700 that I'm holding onto.
Dont ignore the revenue growth, regardless of everything else.
IMO MDF is not out of the woods yet.
I haven't read the 10Q in detail but from the conference call and the earning release (PR), I still think MDF is still far from success though it shows some progress. (ME also mentioned that they are still in early stages/inning)
Several things that I notice that lead me to the conclusion above:
- Q1 MER (for PSN) is one of the best (don't expect it to go any higher, as ME also mentioned several times) for MDF, and not only for Q1 specific (as we know Q1 and Q4 tend to be weaker quarter) but as well for all other Qs. So don't expect them to make much more in Q2 just because it's a stronger quarter. In Q1 they make operating profit of $6.5M (before overhead) from PSN and I don't even know if they can repeat that in Q2.
- HMO loss of $3.9M in Q1 (double from last year though down from last quarter). cumulatively, the cost (and loss) for HMO for the last 2 years has been more than what have been predicted
- Marketing and advertising spending in Q1 for all MDF is only $1.6M so even if they cut all marketing and advertising to $0 in Q2 and Q3, that will translate to only $1M (2 cents) incremental net income (after tax). though I'll take it if earning for Q2 is 2 cents.
- In Q1 they have overall operating loss (even with one of the best PSN performance). They are helped by the interest income (381K) that they have from the $20M+ cash.
- DF left the company (I don't know the impact will be but we will find out in the next 2-3 quarters if we can dismiss this concern altogether)
Additionally:
- Don't expect HMO member to increase too much before the next open enrollment (those 3 special cases won't be too many, plus there will be people moving out of MDF area too)
- Don't expect the PSN member to increase as it has just decrease steadily (slowly though) for the last couple quarters (down 100 from Dec 31st, 2006)
Now on the positive side:
- MER for HMO did decrease and I hope it will stay the same or improve.
- MER for PSN at one of their best in Q1 so they don't have too much operating loss (before the interest income)
- Cash cushion/coffer of $27.9M+ (though $4.2M of them are unearned premium). I hope they keep the cash until HMO is profitable and MDF as a whole bring at least 10 cents in net income on annual basis. in teh mean time let the $1.5M in interest income each year help subsidize the HMO (as well as the PSN business subsidizing the HMO)
- Nice revenue increase in Q1
- $815/month for premium for HMO member (this gives them some room to make some profit).
Btw, if any of you have a copy of Morgan Joseph buy report from 2 years ago, you can see that they are totally way off on their prediction. They estimated 20 cents earning for 2006 and HMO enrollment of 7000-8000 members by end of 2006, and stock price $4 or maybe $5. You guys know what is the actual result was. I thought that is interesting to know and that we need to take whatever analyst said with a grain of salt and do our own DD and take our own educated guess/prediction. and It is improtant to be conservative (or at least not overly over-optimistic) and build margin of safety.
Having said all that... keep the faith long.. ! MDF still has a long way to go (but I also think they have come quite a long way too).. By next year open enrollment complete, I hope MDF HMO (before corporate overhead) to be breakeven (with 7000+ members).
Last but not least, kudos to management (ME and his team) to improve the MER of HMO even in tough competition landscape.. and continue to get the best out of their PSN business... and I'm tempted to say that they did make lemonade out of lemon.. well.. maybe they have better than lemon to begin with.. but you get my point....
JMHO,
Stanu
PS: we should be happy if they stay above $1.8 as long as there is no certainty yet that HMO will be successful.
Txs Stan. I agree with you. Bull
Bull, here's my take on MDF.
MDF is currently priced for the PSN business only which is assumed declining slowly. The reasonable value for MDF PSN business is $1.8 IMO though it is not easy to realize that $1.8 since they might not be able to sell HUM patient to other company (maybe they can sell the whole MDF company to some other company. or merge with other company)
So basically, MDF is currently priced with the expectation that the HMO division will fail. A couple months ago when the stock is at $2.5-$3 (also helped by the strong Q3 result), the market is pricing the HMO division $.70-$1.2 which is probably assuming the chance of HMO will be successful at 30-50% (these numebers are just my subjective projection).
As losses on HMO widens , and even wider than originally estimated by Management, the chance of HMO surviving gets reduced. and if not ebcuase of the PSN business subsidizing the HMO (and the ample $20M cash position), MDF will be in big trouble IMO. So in a way I'm glad that MDF didn't use the cash unwisely (even buyback aor pay dividend could be un-wise.)
In conclusion (IMO), the stock will settle at about $1.8 until there is any sign that the HMO can be breakeven and sustainable which the stock will then increase slowly (but it won't be $3+ anymore until there is huge certainty that the HMO business will be successful). If HMO losses widens again the stock will drop below $1.8. if they decide to close the HMO (while giving the assurance that the PSN business will still bring $12M cash flows each year), the stock will probably stay at $1.8 and we can expect some stock buyback or dividend (or buy some more clinic or members to increase cash flows and economies of scale). If HMO is successful,t he sky is the limit.. maybe they won't be as big as HUM (for sure) but $5 per share isn't going to be difficult to reach.. HUM actually did pretty well.. the alst 2 years also last 5 years.. I just take a look at MDF and HUM chart for the last 2 and 5 years, I can't believe HUM outperformed MDF big time...
Hope this answer your questions. They are all just my opinion and what would I do to the company depending what the HMO progress it.
And btw, I'm still holding this one till at least the end of the year (as I have mentioned for the last 2 years) before I make any further decision (unless their operating losses getting way out of hand before the end of the year).
Stanu78
let me start with this post that i posted at yahoo board right after the earning is released.. next i will say what i think about the stock price...
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Nothing surprising, but something got to give if MDF wants to be successful
As many have said (also consistent to what I said the last couple weeks), the result is not surprising, but something got to give if they want to be successful. And the time is now. This is crucial moment for MDF IMO. Either they will turn the HMO around now or they will continue to worsen. Only time will tell if they will hit the ball out of the park. The PSN (subsidizing) surely helps to give them some extra innings.
They are not out of the woods yet by far and progress around cost control definitely needs to be made ASAP. They got to figure out ways to improve HMO MER and all other costs significantly. There isn't much room for more/wider losses (more than the level that they currently incur). 102.4% HMO MER isn't too bad (if everything else is free), and it isn't the main contributor of $11.7M HMO segment loss for 2006. The other problems are all other cost (corporate overhead, marketing, admin payroll). I'm pointing this because the fact that everything else isn't free and actually these costs increases at much faster pace than operating income growth. This is going to break them unless the manage to reduce these costs (MER isn't the only culprit). Having said all that, I'm pleased to see that Mike Earley realize this (and understand the urgency of the situation) and emphasize several times that they are going to work on this. Additionally, it's interesting to see the conclusion (or hypothesis) that adding more and more counties might not be the best solution to grow profitably at the current situation.
At some point (in the next 12 months), MER for HMO will need to drop to 88-92% IMO (on a year average future run-rate), which might be hard to achieve with 5,000 members.. maybe it will be more feasible when they have 7,000 or 8,000 members... I'm not talking about breakeven level right now but just trying to see if their HMO can work out as a business..
One thing that is nice is the $23M cash, currently earning $1M+ interest (btw, if not for the $1M+ interest income on that cash, they would have posted 1 cent loss for 2006). My vote has been the same. Keep the money in the bank at least until the HMO is profitable. You will never know when you will need to tap that cash reserve. It's like a spare tire or an emergency oxygen tank if you are out in space.
I'm not too excited about external acquisition btw, but that is just my personal opinion though. If they can buy profitable members at the right price, I might consider it, otherwise, continue with the organic growth effort (external acquisition are often overrated and expensive).
All in all, not a bad 2006 in my opinion, considering everything that happened in the industry and the competititive landscape of Medicare Advantage and HMOs.
I'm still long and strong, and will read the 10-K in more detail this weekend...
Stan
PS: yahoo will start showing MDF trailing PE as 200+ :)
Stanu: What do you feel will be the troth price for
MDF? What will make it turn the corner and start going up in sp? Txs. Bull
MDF Reports 2006 Results of Operations
Tuesday March 27, 7:00 am ET
WEST PALM BEACH, Fla.--(BUSINESS WIRE)--Metropolitan Health Networks, Inc. (AMEX: MDF - News), a leading provider of healthcare services in Florida, today announced the financial results for their quarter and year ended December 31, 2006.
Total revenue for 2006 increased 24% to $228.2 million as compared to $183.8 million for 2005. Net income for the year amounted to $473,000 or $0.01 per diluted share as compared to $2.4 million or $0.05 per diluted share in 2005. 2006 results included a segment profit before allocated overhead and income taxes for the company's core PSN business segment of $19.9 million and a segment loss before allocated overhead and income taxes for the company's Medicare Advantage HMO of $11.7 million. Corporate overhead totaled $7.4 million.
Revenue for the fourth quarter of 2006 increased 18.4% to $55.7 million as compared to $47.1 million for the same period of 2005. Net loss for the quarter was $2.7 million or $0.05 per diluted share as compared to a net loss of $545,000, or $0.01 per diluted share for the same period in 2005. Fourth quarter 2006 results included a segment profit before allocated overhead and income taxes for the company's core PSN business of $3.7 million and a segment loss before allocated overhead and income taxes of $5.6 million for the HMO, due primarily to planned advertising spending and to higher than expected medical costs.
Year over year, the company reported a 48% increase in cash and equivalents to $23.1 million at December 31, 2006. Working capital decreased by $1.5 million in 2006 to a total of $19.6 million at year-end. Shareholders' equity improved from $29.7 million at December 31, 2005 to $30.9 million at December 31, 2006, and the company reported no outstanding long-term debt.
December 2006 enrollment in the company's HMO stood at approximately 3,800 while membership being served by the PSN segment stood at approximately 25,600. These numbers compare to 1,400 and 26,200 for the HMO and PSN segments, respectively, in December 2005.
As previously reported by the company, in late February 2007 the Centers for Medicare and Medicaid Services ("CMS") revised certain risk corridor calculation formulas utilized in determining the 2006 Part D reconciliation between health plans and CMS. The need to recalculate these formulas delayed the company's receipt of certain information necessary to complete the accounting for the PSN business for 2006. As a result, the company reported its 2006 results later than had been previously anticipated. These formula corrections resulted in a reduction in fourth quarter operating income of $1.2 million, all in the company's PSN segment.
Michael Earley, Chairman and Chief Executive Officer of Metropolitan Health Networks, commented, "2006 was a year of mixed results for Metropolitan. Our core PSN business, accounting for 86.9% of our 2006 revenues, performed as well as it ever has in terms of profitability and cash flow. These results were offset by difficulties in managing the medical expenses and operational growth at METCARE Health Plans, Inc, our own Medicare Advantage HMO, and its AdvantageCare(sm) product. Our consolidated medical expense ratio was 90.1% in 2006, 88.4% in the PSN and 102.4% in the HMO. While we expect volatility in our HMO medical expense ratio at our current membership levels, we are not pleased with its bottom line performance in 2006. We believe that we are taking the necessary steps to improve our medical expense ratio and we expect these improvements will show results as we move through 2007."
Earley continued, "Based on our current sales activity we anticipate that the April 1, 2007 enrollment in our HMO will exceed 5,000 customers. This projected enrollment takes into account an estimate of future disenrollments and cancellations that can be caused by a variety of reasons. The current Medicare Advantage open enrollment extends through March 31, 2007."
Looking to the future, Earley stated, "We continue to work very hard to maintain and to improve the performance of our core PSN business. With regard to the HMO, we are continuing to pursue our strategy of taking this business and its products to Florida's underserved non-urban markets, but we are aggressively challenging and changing our medical management strategies. In addition to medical expenses, we are working to reduce our overall cost structure and marketing approach for this new business. We look forward to reporting our progress throughout 2007."
Conference Call Information:
Metropolitan Health Networks will hold a conference call to review its fourth quarter and full year 2006 results on Tuesday, March 27, 2007 at 11:00 a.m. Eastern. Michael Earley, Chairman and Chief Executive Officer will host the call. Interested parties may access the conference call by dialing (800) 573-4840 (domestic) or 617-224-4326 (international), pass code # 85373525. The call will also be available via web cast at www.metcare.com, http://www.streetevents.com, http://www.fulldisclosure.com
If you are unable to participate, an audio replay of the call will be available beginning two hours after the call and will be available until 11:59 p.m. on April 3, 2007, by dialing (888) 286-8010 (domestic) or (617) 801-6888 (international) using confirmation pass code 70007051.
Mat, on MDF, I saw your CMS enrollment montly report post. I decided just to wait and see the enrollment report from the company itself as CMS is often lagging and not incorporating the cancel enrollment (before it even started billing the first month) and attrition for existing customer fast enough. (for a while I thought, once you are in, you are locked into the program for some time/at least a year? apparently people can still switch plans before the plan started. probably that's prior to the lock down date).
But the CMS report number (in general) is defintiely a good indicator too to show where the next direction is (whether HMO enrollment up/picking up or slowing down). definitely better than no numbers at all (but I tried not too draw pre-mature conclusion/decision based on the CMS number alone).
What are your thoughts?
Stan
PS: nice to see they have 3702 members.. they are about half way to HMO profitable as a stand alone business.. (about 6000-7000 members based on my estimation for them to break even, without really tightening too many advertising and sacrificing growth.)
Flu season in Florida and HMO industry
Not sure what new HMO enrollment count will look like by the end of the year 2006 (or by the day they reported the 2006 10K. I hope they look good and on track for breakeven "run-rate" by end of Q307, which is my expectation), but it's flu season now in Florida. I'm sure a lot of the members had the flu shots so maybe that will help. The warm weather will hopefully helps to end the flu season sometime in the Q107. Year 2007 is supposedly to be one of the warmest year for a long time.
Having said all that, I just want to tell you guys that I don't have high expectation on the MER performance for both PSN and HMO in the Q4. Overall 2004 MER was exceptionally good and I don't think we will be in that level for 2006. But if we can beat the 2005 MER, I think that will be good enough (excluding the 2 one time cost items in 2005: additional benefit for 0.9%, and the non-cost compliant practice/clinic termination for 0.4% in 2005). 2005 medical/cost utilization is also higher than 2004 (by 1.5%).
I hope the HMO growth is steady in 2007 (doesn't have to be fast but steady and sure) and the deicision to get into the HMO business and adding more counties proved to be a smart move (when it reaches breakeven level sometime in 2007 and on track to be profitable for the full year in 2008). There has been so many downgrade and concerns on the Managed care (HMO) sector (not MDF HMO per-se) which has been so hot (too hot?) for the last 2 years and the fear of Democrats cutting down budget for healthcare. As of today, I'm still confident that MDF will emerge from all those concerns just fine. I believe MDF management have what it takes to execute on the HMO plan and so far they have shown good progress, and in addition to that, I believe that the manage care insustry still has good future and that the govt will not try to make the industry collapse.
JMHO and Be well,
Stan
PS: It's really nice to see the stock price is at $3+.. again (after the huge drop in Q1 2005)... :)
Anyone do any analysis of the 10Q yet? I must say that the PR is exactly what I had hoped for as a best case scenario. My quick look at the 10Q further reinforced that opinion and I particularly liked the quote below. To think they were able to grow revenue, improve MER, and expand the HMO to 3,500 while still increasing cash flow and net income is pretty impressive. If I read the PSN and HMO revenue breakout it appears that we are 2/3 of the way to HMO breakeven. Am I reading this correctly? The wisdom of this esteemed board would be much appreciated. I certainly plan to buy more.
Mat
The Company anticipates that, for at least the next twelve months, the HMO's ongoing development efforts, reserve requirements and operating costs will be funded by the Company's current cash resources and projected cash flows from operations, and expects to lose approximately $3.0 million to $5.0 million in 2006 for this continued development. The HMO has filed expansion applications for several additional Florida counties. While no assurance is given that approval will be granted to operate in any or all of these counties, the Company has been investing resources in network development efforts for this expansion. Enrollments in these new markets could begin as early as January 2007, with marketing and sales efforts commencing in late 2006.
Humana: how about the growth they have announced in their medicare enrollment? And futures?
Maybe, just maybe, this could be an omen for MDF?
Whatcha think?
jmo
Bull
The Pard D drug benefit... let's hope so Bob...
and 200-300 member per month... (and that could be faster if they apply for more counties but I'll stay conservative with about 200 members per month)
I think we will see insitutional holding will increase...
I am not usually supersticious.. but I have a hunch feeling that the HMO will turn out to be ok/just fine (and not going to fail just like the clinical laboratory business and pharmacy business)
I hope it's not overconfidence... and also not irrational exxuberance...
btw.. it's nice to see the tax is in the income statement... but they actually haven't really paying the tax.. so for some time the cash flows will be higher than income (if everything else is the same) and they can use the cash flows to fund the HMO...
Stan
stanu I've been too lazy to do the math on the HMO. Hard to dispute your figures without more detail. 15,000 does seem high to break even. That's probably going to take longer than two years to enroll that many. I could see 200-300 per month for two years and getting to your number as much more achievable. Let's hope the new drug benefit drives many to MDF's door. Bobwins
good post (CC recap) Matt
Bob I forgot to mention that I’m making the assumption that the current 750K-$1M HMO quarterly overhead cost will continue to be stabile.. (though I know ME said they will ramp up more marketing cost but I hope that will be temporary and not ongoing) for the break even members calculation.
And probably instead of $2-4M for scenario 2, it probably should be $1-$3.3M.. but it’s just a rough/directional estimate…
I really hope they can break even with about 5000-6000 HMO members.
But I also tell ME that I’d rather see them do it right even if it has to cost a bit more. If he has to spend more on marketing up front and cost them some more money. Then so be it, as long as the money well spent and bring the appropriate amount of return/members…
I’m actually getting excited on MDF again as last night I replay the CC and re-read the 10Q.. and especially after stock pull back a bit… I probably will still buy this stock if I don’t have this stock at all right now.. but probably waiting for a lower price than today’s price.. but now MDF is already my largest holding (about 30%) so I can’t add more…
Stan
Hi Bob. My HMO Estimate.
First, Mike seems upbeat (and excited about the future) and I'm happy to see that...
The earning wasn't the best today.. but actually better that what I expected (better by $200k)...
I didn't sell Bob... I maintain my focus for the long term... but will sell when fundamental has deteoriated...
200-250 member per month added is good.
Someone ask about the HMO breakeven point.. below 15,000 members... IMO 15,000 is too high.. the guy didn't ask the right question/range .. though ME might refure to answer if it's too close to what ME has thought...
I think (based on my calculation) breakeven for the whole year (Q1 and Q4 loss and Q2 and Q3 gain to offset the loss) will be between 5000-6000 members (scenario 1)
And to be able to break even for each individual quarter (even in weaker quarters Q1 and Q4) IMO they will need 7000-9000 members. This scenario will probably give them annual $2M-$4M operating profit from Q2 and Q3 combined. (scenario 2)
so that is way below the 15,000 members that was asked in the CC... I'm using approximately $7000 premium per year received per member and average of 90% medical expense ratio...
this estimate might be aggressive but I feel MDF HMO division has potential to have a breakeven run-rate (scenario 1 above) before year 2006 ended
All the best for MDF and for us...
Stan
PS: Hi Matt.. Hi Len... Hi Bull... Hi Tim...
I listened to the CC today and I found it to be very open and informative. I took quick notes while I was listening and the following jumped out at me:
Lots of intelligent questions and interest (Morgan Joseph, PSC Capital etc.)
300 members so far evenly split between two market areas (east and west coast). Signups have been on an increasing trend over the 5 weeks. Each week better than the one before. ~80 from brokers and the rest internal sign ups. Lunch seminars in progress to encourage membership in HMO. Hope to see pace accelerate (don't we all!)
Tried to avoid guidance in any form, but admitted that breakeven is less than 15K (I sure hope so). Believes we should reach breakeven in next couple of years (I expect he is being conservative, which I don't blame them) HMO startup salary 800K of 1.7M reported in PR.
Extensive discussion of increased costs and why they think they are controlling it. Admitted there is a certain amount of uncertainty in costs.
Ended with statement that it is a terrific year so far with an expense "bump in the road". Real excitement is the HMO.
Very upbeat, but factual without a lot of obvious hype.
IMO, I would have been very happy with 200 in first month, but almost 300 is fantastic. If pace does quicken, breakeven will be much closer than I originally thought. I am considering freeing up some more cash to buy a little more.
I am definitely interested in the thoughts of others.
Mat
timhyma....mdf is a long time favorite of mine. Low p/e is a little deceiving. They have started up their own HMO in 6 counties immediately north of current territory that they subcontract from/for Humana. This startup will increase expenses by 750K/qtr for the next two years. May be lumpy, with extra startup expenses in q2/3. Don't know.
q1 already had the extra expenses. Unknown is how fast will revs from new operations ramp up and how will it impact previously profitable operations. Made .02 in q1 with full taxes for first time in several years plus HMO startup of $700K. I think .02 eps is more representative of future eps for MDF than ttm of .36, which has tax credits and no taxes.
Long term, this will likely be a winner due to excellent mgmt and opportunity in #2 Medicare market in the country.
Bobwins
Thank you. I usually avoid the yahoo boards <g>. Better quality in the Ihub community, imo.
I think I'll buy a few shares tomorrow if it dips.
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