Pediatric Services of America, Inc. (“PSAI”) is a fast growing healthcare company and is the nation’s largest focused pediatric home health care provider. PSAI trades at 14x 2004E EPS of $.83, while its closest three comparable small cap home healthcare peers trade at an average of 20x 2004E EPS. A 20 multiple on PSAI’s 2004E EPS results in a price of $16.60, up nearly $5, or 42% from its present trading price.
PSAI is a provider of home health care and related services for children. The Company operates in 22 states through a network of 120 offices. A map of locations is provided on the Company’s website: www.psakids.com. Health care services provided to children include nursing, respiratory therapy, rental and sale of durable medical equipment, pharmaceutical services, and infusion therapy services. In addition to its main focus on pediatric care, the company also provides respiratory and infusion therapy services to adults. Fiscal 2003 revenue was derived 77% from the pediatric market and 23% from the adult market.
There are certain advantages to focusing on the pediatric portion of the home health care market. Because of the level of attention and care required by pediatric patients, the rates charged for services are higher than rates charged for adults. Furthermore, due to the higher level of acuity and the nature of the treatments, pediatric care reimbursement rates are not normally subject to capitation. From the perspective of the payor, home health care is a much less costly alternative to hospital stays. And from the perspective of the patient and the family, home treatment is understandably preferable to hospital treatment.
Pediatric patients tend to have long lengths of treatment compared to adults, with higher levels of acuity, as mentioned above. The medical conditions PSAI typical treat include bronchopulmonary dysplasia, digestive and absorbtive diseases, congenital heart defects and other cardiovascular disorders, cancer, cerebral palsy, cystic fibrosus, pulmonary disease, endocrinology disorders, hemophilia, orthopedic conditions and post surgical care.
The Company has three core products and services: 1)Private Duty Nursing and PPEC (prescribed pediatric extended care), 2)Respiratory Therapy and Home Medical Equipment and Services, and 3)Specialty Pharmacy and Infusion Therapy.
Private duty nursing consists of home nursing for pediatric patients with a variety of illnesses. Unlike home nursing for geriatric patients which is short duration (weeks) and for a few hours a day, home nursing for pediatric patients requires care for an average length of eight months and a daily average of 10 hours. The Company has PPEC centers in FL, GA, and NC which provide for care and therapy for medically fragile patients. This segment grew revenues at an average of 3% over the past two years and accounted for 47% of fiscal 2003 revenues.
Respiratory therapy and home medical equipment and services involves the provision of respiratory therapy services to patients and includes the rental and sale of equipment as physician prescribed. This segment grew revenues at an average of 9.9% over each of the past two years and accounted for 22% of fiscal 2003 revenues.
Specialty pharmacy and infusion therapy is the fastest growing segment, increasing revenues at an average of 16.6% over each of the past two years. This segment provides pharmaceuticals and infusion therapies for its patients in the home or doctor's office and operates a mail order pharmacy. This segment accounted for 31% of fiscal 2003 revenues.
Overall revenue growth for the two year period between the fiscal years ended 30-Sep-01 and 30-Sep-03 was 8.2%, yet operating income and pretax income (from continuing ops) grew 39% and 24%, respectively.
The Company’s strategy for growth includes capitalizing on a geographic area where it can provide each of its three core products/services. The Company had recently refinanced its credit line to provide for up to $10 million to purchase/retire its outstanding public debt ($20 million remaining outstanding) and $10 million for small acquisitions (at 3 to 4x EBITDA multiples). So acquisitions will be targeted to supplement the organic growth initiatives. In the past two fiscal years, the Company spent about $5 million on acquisitions.
Valuation was touched on in the first paragraph. PSAI is trading at 14.1x fiscal 2004 EPS and 12.3x fiscal 2005E EPS. The three closest comps, OPTN, AMED and GTIV (all small cap, home health care companies) trade at an average of 20x current year EPS and 17.5x next year’s EPS. The three comps trade an average of 80% of revenues (total enterprise value to revenues) while PSAI trades at just 46% of revenues. The three comps trade at an average of 13.8x trailing EBITDA while PSAI trades at just 6.8x trailing EBITDA. No only does PSAI trade at a lower multiple than it’s peers' averages, it trades at lower multiples than lowest of the three comps for both trailing EBITDA and current and next year’s EPS. I feel PSAI could easily reach $17 with a few more quarters of strong numbers.
For the first quarter of fiscal 2004, which ended December 31, 2004, PSAI reported a 57% increase in EPS, a 14% increase in revenues and a 38% increase in operating income over the prior year’s fiscal Q1.
In summary, PSAI is a leader in its niche, is experiencing high growth in revenues, operating income, EBITDA and earnings, and trades at low relative and absolute multiples. Finally, the company has recently beefed up its investor relations in an effort to get its story out and has begin to appear at investor conferences.
Continued strong performance; increased effort by the company to tell its story (appearing at conferences and boosting IR function).