Replies to post #49 on Metropolitan Heath Networks (MDF)

[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+ :)

[stanu78]

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