October 10, 2014 - 5:12pm EST by
2014 2015
Price: 36.48 EPS $0.20 $0.49
Shares Out. (in M): 41 P/E 182.4x 74.4x
Market Cap (in $M): 1,493 P/FCF 124.5x 59.7x
Net Debt (in $M): 441 EBIT 51 74
TEV ($): 1,934 TEV/EBIT 37.9x 26.1x
Borrow Cost: NA

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  • Insider selling
  • Rollup
  • Medical Examination
  • failed integration
  • Premium to Peers



There are a few reasons why we think EXAM is a good short.


1)      The company is a rollup (48 acquisitions) in an industry with negligible organic growth since 2009 and some negative economies of scale.


2)      Industry participants that we spoke with said that internal morale at EXAM is low.  They have made promises to their acquisition targets that haven’t come true and the back end integration has been difficult.


3)      Insiders sold the majority of their shares in May of this year.


4)      The company trades at a premium valuation (14.5x 2015 Street EBITDA, 16.8x 2014 Street EBITDA)



Business Description


ExamWorks is a leading provider of independent medical examinations (“IMEs”), peer reviews, bill reviews, Medicare compliance, and other related services (“IME services” or the “IME industry”). We provide these IME services through our medical panel of independently contracted, credentialed physicians and other medical providers. Our clients include property and casualty insurance carriers, law firms, third-party claim administrators, and government agencies that use independent services to confirm the veracity of claims by sick or injured individuals for workers’ compensation, automotive, personal injury liability and disability insurance coverage. We help our clients manage costs and enhance their risk management and compliance processes by verifying the validity, nature, cause and extent of claims, identifying fraud and providing fast, efficient and quality IME services.


We deliver our services in all 50 U.S. states, Canada, the United Kingdom and Australia. Our operating model enables us to offer our clients the localized services they are accustomed to, while realizing the benefits of scale that accrue to a larger, integrated company. We provide our clients with the local presence, expertise and broad geographic coverage they increasingly require. Our size and geographic reach give our clients access to our medical panel and proprietary information technology infrastructure that has been specifically designed to streamline the complex process of coordinating referrals, scheduling appointments, complying with regulations and client reporting. Our primary service is to provide IMEs that give our clients authoritative and accurate answers to questions regarding the nature and permanency of medical conditions or personal injury, their cause and appropriate treatment. Additionally, we provide peer reviews, which consist of medical opinions by members of our medical panel without conducting physical exams, and bill reviews, which consist of the review of physician and hospital bills to examine medical care rendered and its conformity to accepted standards of care and/or pricing.


The qualifications, experience and availability of physicians and other medical providers are critical to the IME industry, as they are the primary determinants of the speed and quality with which IME services are performed. We provide our physicians and other medical providers with seamless document management, scheduling, transcription and tracking systems, helping them increase efficiency and optimize the number of IME services they can conduct based on their availability. Our ability to minimize administrative burden and schedule appointments efficiently encourages physicians and other medical providers to perform IME services through us. Based on client and physician feedback, we believe our medical panel effectively meets our clients’ needs.


Our revenues consist primarily of fees per IME service performed. Our fees vary by physician/medical provider, specialty and type of service. Our primary costs are the payments made to physicians and other medical providers on our medical panel. Our costs are variable as virtually all medical panel members are independent contractors, allowing us to maintain and manage our operating margins more effectively. Our long-standing relationships with clients have resulted in historically consistent and recurrent demand for our services.



For a roll up to be successful you need the acquirer to cleanly integrate the target companies and for there to be some cost or revenue synergies that come from greater scale.  EXAM has completed 48 acquisitions but has been unable to achieve gross margin expansion.   Their only way to increase operating income margins is to reduce their S,G&A costs.  EXAM has attempted to do this by forcing their customers to make use of their proprietary IT systems.  This requires clients to learn a whole new system (in addition to their own internal IT system) over the course of a multi day training seminar.  Many individuals at potential customers prefer the high touch method of sending everything over to the provider and having them deal with the headache rather than taking the time to learn a new system and  upload documents.

We have spoken with several companies that compete with EXAM, one of which had been approached as an acquisition target.  The industry scuttlebutt is that EXAM approaches small mom and pop players with large headline prices, but those prices are dependent on unachievable earn out provisions.  In addition, they promise independence after the acquisition is completed, but the reality is that they force their acquisition targets to cut costs by firing employees.  The result is that the culture at the acquired company changes dramatically.  Prior to being purchased by EXAM, if there was too much work to be done by 5 PM, the owner and the employees would stay late to get it done.  After they are acquired by EXAM, the owner heads home with everyone else at 5 PM.  They no longer feel the same level of accountability as they are no longer entrepreneurs, they are branch managers reporting in to a headquarters that they feel deceived them. Frequently they are counting down the days until the end of their non-compete agreements.

One other fact that will ultimately constrain EXAM’s market share is that their clients need opinions from multiple parties in order to demonstrate a reasonable range in a courtroom.  As EXAM becomes a larger % of the industry, they face the potential problem of a firm trying to hire two of their local units for opinions, inadvertently damaging the legal independence of the examinations.    

In May insiders sold over 8% of the company’s outstanding shares at $32.30 per share, which represented the majority of their holdings.  We see that as an important piece of evidence corroborating the story we are hearing from others in the industry.  Shortly before their share sales the company increased its organic revenue growth expectations. We are dubious of the timing and believe it will be very difficult to consistently achieve that over time due to the lack of industry growth.

Our downside target is 8.0x 2015 EBITDA or ~$15.50.  The stock is still expensive there on an earnings basis at >30x.  If the smoke of integration problems becomes a clearer blaze then the stock could trade much lower.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


Missing organic revenue growth expectations
Reducing long term EBITDA margin expectations
Continuing to have problems integrating their acquisitions
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