|Shares Out. (in M):||71||P/E||0.0x||0.0x|
|Market Cap (in $M):||40||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-10||EBIT||0||0|
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Hooper Holmes (HH) is a fast-growing, undervalued micro-cap company with significant hidden assets not currently reflected on its balance sheet. HH stock trades for $0.56, but should trade at ~$1.00 based on private market valuation clearly established by two very recent acquisitions of directly comparable peers.
Hooper Holmes provides health & wellness services to employers. This means it hosts annual or biannual health fairs, typically at large corporate sites, during which it performs blood, biometric, urine, and other screenings in order to assess employees’ chronic disease risks (diabetes, asthma, heart disease, depression, cancer) as well as other health characteristics (body fat, cholesterol, blood pressure, blood glucose, tobacco use, alcohol use, drug use, etc.).
At some of these events (roughly 30%), Hooper Holmes also offers follow-on counseling and lifestyle planning to the screened employees, in an effort to improve their overall health and thereby reduce the health insurance premiums the employer pays.
The company’s historical performance has been extremely underwhelming, with the stock languishing under $1 for the vast majority of the past five years. Hooper Holmes used to own a bunch of mediocre healthcare services businesses. This is how the financials looked:
|Operating (loss) income||($1)||($1)||$0||($3)||($17)|
Now, after a series of divestitures, the single remaining business, Health & Wellness, looks like this:
A new management team was put in place in mid-2013. They closed the company’s New Jersey headquarters and relocated corporate operations to Olathe, KS. More importantly, the management team sold all of the company’s subsidiaries, save the fast-growing Health & Wellness operation. The final sales were announced just a few weeks ago.
The Health & Wellness Industry
The rapid growth of the H&W segment—now Hooper Holmes’ core business—is no accident: the health and wellness industry is experiencing secular growth of 25%+ annually. You don’t have to take me at my word on this. Here is a smattering of HH’s competitors, all private, and the growth rates they have reported on their websites, in interviews with local newspapers, etc.:
This growth is happening because:
1) Employers are attracted to the ROI on employee wellness spending;
2) The U.S. Healthcare reform bill gives employers increased flexibility to use monetary incentives to reward employees for improving their health;
3) The affordable care act includes $200 million worth of grants for wellness programs at small businesses and $1 billion for community health programs.
Some industry observers doubt the ROI figures posited by the H&W industry, but on the other hand there are some very large corporations publicly championing H&W spending, and claiming they have the numbers to back up their enthusiasm.
Either way, the Health & Wellness industry is growing rapidly but is still very small. Hooper Holmes is one of the leading H&W providers (see below), yet it will only generate $30M+ of revenue this year, excluding acquisitions.
There is a lot of growth left. A 2012 RAND study found that while 51% of all employers offer wellness programs, those programs saw just 5-20% participation rates in weight, disease management, smoking cessation, and fitness programs. These participation rates will increase over time as more employers use greater incentives (and penalties) to encourage employee participation in wellness programs.
The same RAND study also reported a strong correlation between size and H&W offerings: 91% of companies employing 50,001 or more people offer wellness programs, while just 39% of companies employing less than 100 people do. An increase in wellness program implementation at medium- and small businesses will provide another leg of growth for the industry.
For Hooper Holmes specifically, another opportunity includes performing post-screening lifestyle coaching sessions (often called “interventions”) for a greater portion of employees it screens. As I mentioned earlier, the company currently does this with only about 30% of its screenings.
Finally, maybe the simplest way to look at the opportunity is this: there are 160 million working Americans, and in 2013, Hooper Holmes, the second largest H&W screenings provider, performed 420,000 screenings—that represents just one quarter of one percent of the working U.S. population.
Growth and Profitability
Hooper Holmes’ CEO, Henry Dubois, has publicly stated a goal of $100 million of revenue in four to six years. This implies ~25% annual growth, which doesn’t seem far-fetched assuming continued high industry growth and a bit of acquired revenue.
As for profitability, I think a 10-15% EBITDA margin is attainable, but the company will need a bit more scale to get there. At the current revenue run-rate of ~$33M, and assuming a low-30%s gross margin, HH is generating about $11M of gross profits, against about $13M of cash overhead costs. I think there are probably some further cost reductions still to come, but I doubt they will be major. HH likely needs to get to $40M or so of revenue to break even.
Recent Comparable Transactions
1) On March 6, 2014, Interactive Health, a PE-owned H&W provider, acquired Health Solutions, another H&W provider. The terms were not disclosed, but based on conversations I had with people close to the deal I believe the purchase price was approximately 1.2x trailing sales. In addition, these conversations revealed that the target, Health Solutions, was growing “only” about 15% annually, and had significant customer concentration, with a single very large customer’s contract coming up for renegotiation within the next few years. Interactive Health generated a mid-to-high teens EBITDA margin, without public company costs.
2) On March 11, 2014, Quest Diagnostics (DGX) announced it would acquire Summit Health. In Quest’s recently filed 10-Q, the company disclosed that it paid $113M in cash, as well as a contingent consideration of up to $25 million based on financial performance over the following three years.
Summit has stated that it generated $80M of revenue in 2013 and expected to generate $100M in 2014. If Summit earns the full earn-out, the price Quest paid will equate to 1.4x estimated 2014 revenue.
These deals clearly establish a private market value at somewhere around 1.3x sales. I think Hooper Holmes could perhaps merit a small premium to this multiple because A) it is growing faster Health Solutions, and B) it is a pure-play H&W business whereas Summit Health also has an on-site vaccinations business, which is more capital-intensive, and slower-growing, than the H&W screening business. But since I don’t have strong conviction in these distinctions, I use a 1.3x sales multiple for Hooper Holmes.
H&W segment actually had a rough year in 2013 due to an interruption in revenue from its largest customer; revenue from that customer fell from $7.4M in 2012 to $4.4M in 2013.
However, management stated on a recent earnings call that:
A) it expects that revenue from the large customer will return to 2012 levels in 2014, and
B) revenue from all other customers is currently growing approximately 35%.
Doing a little bit of simple math, it is easy to formulate a basic 2014 revenue forecast:
|Largest Customer Revenue||$7.4||$4.4||$7.4|
At $33M of forecasted revenue and a 1.3x revenue multiple, I get $43 million of value for the business.
But there is also a lot of value in various other balance sheet items unrelated to the core H&W business:
1) As of the most recent filing, the company had $3.1 million of net cash.
2) After quarter-end, the company sold its remaining non-H&W businesses for $3.7 million; an amount not yet reflected on the balance sheet.
3) The company’s old NJ headquarters (now closed) recently sold for net cash of $2.5 million; this asset was classified as held for sale on the most recent balance sheet, so the $2.5 million is not yet reflected in the company’s cash balance.
4) The company is likely to receive a $1 million holdback payment in 2015 related to its sale of Portamedic, one of its prior subsidiaries.
5) Finally, the company has federal and state net operating loss carryforwards of $140M and $127M, respectively. These assets are carried at $55M, but the company books a full valuation against them. It is hard to know exactly what the NOLs are worth given the wide range of profit outcomes, but using various DCFs I’ve come to a value around $15M.
Adding it up:
|Cash on Balance Sheet||3.1|
|Real Estate Proceeds||2.5|
|Subsidy Divestment Proceeds||3.5|
|Value per Share||$ 0.96|
|Current Share Price||$ 0.56|
A lot of upside based on precedent transactions. Give the company a few more years to grow at 20%+ and the value could be considerably greater.
It is not hard to see why this idea exists: $40M market cap, no sell-side coverage, significant off-balance sheet assets, illiquidity, financials that obscure the underlying business performance, etc.
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