July 23, 2009 - 11:41pm EST by
2009 2010
Price: 4.30 EPS $0.30 $0.45
Shares Out. (in M): 16 P/E 14.0x 10.0x
Market Cap (in $M): 66 P/FCF 8.0x 5.3x
Net Debt (in $M): -10 EBIT 5 8
TEV ($): 56 TEV/EBIT 11.0x 7.5x

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In American Caresource, you can currently buy a healthcare cost management business at 12 times free cash flow with revenues expected to grow at least 20% this year, minimal capital spending requirements. The stock price dropped over 50% in June after the company said revenue growth will be in the 20% to 46% growth versus original estimates of 46% to 63%. The sell-off seems overdone. Insider buying in June suggests management would agree. Even if the company only meets the lowered revenue growth of 20%, the operational leverage inherent in the business model would suggest a growth in free cash flow of 1.5 to 2 times. A business that is growing free cash flow in the 40% to 90% range deserves a much higher free cash flow multiple of 12. Capital spending neeeds is mostly in buying more software and computers and servers.


American Caresource (Stock Symbol: ANCI) is under the radar because it was spun-off from a very small company called CareGuide in 2005. Careguide's business model failed and was recently taken private at a small fraction of its 2005 valuation. ANCI has a network of ancillary healthcare providers (physical therapists, home service nurses in the dialysis care and other ancillary services) and helps customers expand their provider choices available to their patients and reduce overall ancillary benefits costs. On the one hand, the company's customers are preferred provider organizations, third party administrators, workers compensation benefits administrators, insurance companies, employers, unions. On the other hand, the company helps providers increase volume by giving them access to more patients and by managing more efficiently the provider's most important resource - time. In the long-term, the company will develop proprietary informational edge from both the healthcare providers and customers and will continue to fill a business need by delivering cost savings to the customers and providing value-added products and services to the health care providers. The company has a board that consists of people in the pharmacy benefits managements and healthcare businessmen that have built very successful businesses in the sector (Pappajohn, Ed Berger)


On June 16, 2009, ANCI provided revenue guidance for full year 2009 to be in the range of $70 to 85$ million. This translates to a 20% to 46% growth for the full year compared to original estimate of 46% to 63%. The main culprit of the lowered growth guidance was that their organic growth has been lowered due to macro-economic issues. However, hidden in the lowered revenue guidance are many bits of information that are encouraging: 
" ... pipeline of potential sales prospects is also growing, discussions with potential clients representing 8 million lives " 
" ... encouraged by the growth in its network of providers adding 600 providers representing 1,400 sites to a total of 3,000 providers in 26,000 sites." (this suggests an increase of 20+% providers) 
" ... our laboratory and diagnostic claims are expected to increase disproportionately as new and established clients leverage our key provider agreements ... our claims volume is expected to increase at a more rapid rate than our revenue per claim during 2009."


No one knows how the economy will turn, but there is added comfort in that this business pretty much has negligible maintenance capex while waiting for the macro factors to improve. All of the capex is in growth capex and they are mostly software and IT systems. Management expects to make another update on August 13,2009.




Investors will discover this oversold stock when the revenue will show it is still growing at least 20 percent range. 

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