|Shares Out. (in M):||2||P/E||0.0x||0.0x|
|Market Cap (in M):||38||P/FCF||0.0x||0.0x|
|Net Debt (in M):||-3||EBIT||6||7|
Warning: This is an illiquid stock and micro-cap but that being said for the patient investor one can build a decent position. This might be a better fit for a personal portfolio rather than a fund, but I own it in both.
Birner Dental management Services (BDMS) - represents an opportunity to invest in extremely high ROIC business, that is immune to real technology threats, in the hands of astute owner managers trading at a cheap valuation. Management has a history opportunistically deploying capital and returning it to shareholders over the past 5-7 years. The stock has had very attractive returns over that time frame. I believe an investment in BDMS has little downside and should double over the next 2 -3 years.
The stock has been written up before on VIC at even more mirco valuations, and the previous write-ups give a good description on the business. I will proceed with a brief summary of the business. Birner is a dental management company focused on the Colorado, Arizona and New Mexico markets. In essence it owns a network of 60 + dental centers under the Perfect Teeth brand. They service employer groups and self-insured patients under discount membership plans. Early On Birner was started by two brothers, one a dentist and the other a banker that raised about 40 mm dollars and went on an acquisition spree to buy dental offices. Initially not only did the blow their equity capital, but they also levered the entity and when they over-paid, and under -performed they had a near death experience in about 2002. Since then this team has found religion, de-levered the balance sheet, and then started buying back their equity in huge amounts. Over the next few years the stock did very well. Today the company is modestly levered and still churning out good amounts of cash. They generally use that cash to pay down debt and pay out the dividend when they have no better use for it and when they can't open new offices that meet their hurdle rate they buy back their stock. Sometimes it really good to have a banker in management.
Over the last 3 years as the economy has softened folks have been left without jobs and as a result earnings at Birner have suffered. But even at a depressed level this is a great business run by a good management team, with significant skin in the game. I think that the downturn has represented the real worst case scenario for this business and we should see things only improve from here.
Birner has a very successful core group of practices in the Denver area, and they have been trying for years to replicate those networks in Arizona and New Mexico. They have been having some modest success but nothing like they have hoped for. During the recent events of 2008 they had the opportunity to do a few more tuck-in acquisitions of dentists that fell on hard times. But for the most part since they turn around the business they have focused on ground up openings (de Novos). It's a great business with practices usually cash-flowing in less than six months.
Going in 2011 Birner is going to continue to expand into the Arizona and New Mexico markets but most importantly is now experimenting with higher value added services, specialty/surgical dentistry (in Denver). Previously when patients needed something like a root canal Birner referred the business elsewhere. Specialty dentistry is an even better business than bread and butter dentistry....most people can defer a teeth cleaning but when you need a root canal you need a root canal. They recently announced a new surgical site in Denver. If successful Birner will have a growth driver for its core business, and look to replicate those services across their network.
Most of the actual costs of building a new office is expensed and the maintenance cap-ex is about 60-75K a month. Dental equipment lasts a long-long time, far longer than the accounting depreciation cycle and the margins on the business are quite good. A new office usually breaks-even in a just a few months and produces ROIC in excess of 100%. But unlike a Starbucks it's hard to open new offices, mostly because finding great dentists is extremely difficult. The company has stated to me repeatedly that finding and retaining new dentists is its number one challenge. Unless the company see a compelling opportunity they tend to stick to de novo development and have been disciplined about the process. Managment has stated they always measure opening or acquiring an office against the repurchase of their own stock. It's a rare trait to see that in a management team, and one they have demonstrated with large stock buy backs over time.
Birner has done two Dutch tender in the past and had shown an appetite to buy back any level of stock presented to it when the stock was trading cheap. We think that you have an implicit liquidity put on the stock such that while it might be difficult to get in the company they will buy back any block you have should you need to get out quick. I have sold stock back to the company on occasion when I needed to. The have stated they are willing to lever to 2X EBITDA which is about 12-14 mm dollars. They currently only have about 4.0 mm of debt.
In short this is a great core business, that isn't going to get displaced anytime soon. It has a management team that is prudent, owns almost half the company, and has shown that they know not only how to run their business but also how to use capital structure to enhance value for shareholders. Once the economy returns so will Birner's margins and if they can prove that surgical centers are really viable complements margins and revenue should increase. Even if Birner shows no growth it is pretty cheap, and if they start showing any growth I think you will see bigger cash flows and a higher multiple which may lead to better than a double.
Shares out: 2.234 mm FD shares
Net Cash: 2.5 mm (after options proceeds)
EV = $35.5 mm
2010 Trailing FCF (pre-tax) = 6.1 mm
EV/FCF = 5.81 X
This isn't a complicated or sexy idea but it's a safe and attractive one. Birner's business earns close to 100% ROIC, throws off bundles of excess cash and is at a trough in its earnings cycle. With moderate leverage, an astute management team and the prospect of both growth from a recovery and via offices and services I think the stock can easily double over the next 2 years with little downside. In the meantime they pay out close to a 5% cash dividend. Should stock price not move upward I am virtually certain the mangment team will do a massive buy back on the order of 30-40% of the company. In 2 year with cash build and some modest buy backs Birner will be trading at 4X EBIT which is simply too cheap for a business this good.
Management has on 1 or 2 occasions made large grants to itself in the past, since they essentially control the board, but at current valuations there seems room to accommodate this event should it happen again.
Cheap valuation, coupled with growth from new surgical centers, and dental centers, and stock buy back.
Recovery of Economy. In the mean time it pays a healthy dividend of about 4.8%
|Subject||Earnings and Update|
|Entry||11/12/2010 01:49 PM|
Earnings below. Basically flat to slightly up EBITDA. Earnings are a little depressed since they are investing in training, advertsising, and ramp up of the new implant/surgical center. They continued to pay down debt, and buy back stock, and product very healthy cash flow. The announcment brought some headline sellers into the market so it is an opportunity to buy some shares if interested.
DENVER, Nov. 11, 2010 /PRNewswire-FirstCall/ -- Birner Dental Management Services, Inc. (Nasdaq:BDMS - News), operators of PERFECT TEETH® dental practices and Vantage Dental Implant Center, announced results for the third quarter and nine months ended September 30, 2010. For the quarter ended September 30, 2010, revenue increased $1.5 million, or 10.0%, to $16.0 million. The Company's earnings before, interest, taxes, depreciation, amortization, non-cash expense associated with stock-based compensation and discontinued operations ("Adjusted EBITDA") increased $89,000, or 5.3%, to $1.8 million. Income from continuing operations for the quarter ended September 30, 2010 increased $14,000, or 2.9%, to $486,000 compared to $472,000 for the same period of 2009. Earnings per share from continuing operations increased 4.0% to $0.26 compared to $0.25 for the quarter ended September 30, 2009. Net earnings per share increased 34.3%, to $.26 for the quarter ended September 30, 2010 compared to $.19 for the quarter ended September 30, 2009.