Patient Home Monitoring Corp. (TSX.V:PHM) Michael Dalsin on What’s Driving the Share Price

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Midas Letter
Patient Home Monitoring Corp. (TSX.V:PHM) Michael Dalsin on What's Driving the Share Price

Patient Home Monitoring Corp. (TSX.VPHM) (OTCMKTS:PHMZF)’s Michael Dalsin explains why his company’s share price has more than doubled in the last six months since we first covered the company in June 2014.

Midas-Letter-financial-radio-podcast-thumb[four_fifth_last padding=”0 0 0 20px”]Listen to the interview with Michael Dalsin:


Full Transcript:

James West:           Michael, thanks for joining us again.

Michael Dalsin:       No problem. Good to talk to you.

James West:           So Mike, the first time we talked was back in June of 2014 and your company had just announced an approximately 50% increase in revenue and roughly 300% improvement in profit. Now here we are six months down the road, the stock price has almost doubled. What’s driving the success of the company and the share price and on the business side and is this going to continue in your opinion?

Michael Dalsin:       Well, I think the growth obviously is what I believe is driving the share price. And I think the last time we spoke we were annualizing about $5 million in EBITDA and we last reported our quarter ending in September and it was about $8 million in EBITDA. So we’ve grown even more since the last time we’ve spoken and we’re getting close to about $10 million in EBITDA as we speak. So the business model is performing. That is inevitably what is driving this. And just to remind you and your callers on what the business model is, we are in the healthcare services market in the United States. We basically monitor and treat patients with home-based devices and we basically have a very simple acquisition-based strategy. We go buy small businesses that generally have patient databases that are servicing one type of disease state so they might be servicing only pulmonology or only cardiology patients. We buy these businesses at very good multiples between three and five times EBITDA and generally speaking we’re buying them for the databases. I mean, it’s nice that we get cash flow, it’s nice that we get some people who know how to deploy these technologies into the home. Those are very good things, but ultimately what’s driving our growth, driving our stock price, driving our cash flow is that once we buy these businesses we are increasing EBITDA and increasing revenues through essentially selling patients services that they need and becoming basically a one stop shop for chronically ill aging patients in the United States.

James West:           Mm-hmm. Okay. So how much has your client base grown in the last six months?

Michael Dalsin:       So I think we spoke last in June. We had just closed a business – an acquisition in June and so to give you some statistics from the revenue because that’s how I think it’s best explained through dollars rather than patients.

James West:           You bet.

Michael Dalsin:       We have essentially acquired $26 million worth of inorganic growth. We’ve turned that from $26 million and close to $40 million in run rate growth so our annualized organic growth rate is well into the 40% range, close to 50%. We’ve also bought $5.2 million worth of EBITDA and we changed that to close to $10 million of EBITDA. Now, when we do buy these businesses generally speaking, we impute costs. We invest in technology, we invest in middle management, we invest in accounting. So the day after we buy a business, we reduce their profits. There’s no doubt about that. The gamble I suppose that we take in buying these businesses and it’s a pretty educated gamble at this point because we do our due diligence pretty well is that we can raise revenue significantly by cross selling. So I think when we spoke in June, we had a business with about 30,000 or 35,000 patients. It’s difficult to describe the number of patients because it doesn’t really tie to revenue perfectly, but today we have about 60,000 patients and we are about double or more than double the size of revenue that we were in June and we keep going. We have an acquisition queued up very quickly here that I expect will close in the first quarter so, you know, we will have another pop here both inorganically and organically. And I will say also our management team is now been together for a year and our operational team and they’ve told us they understand how to buy these things, they understand how to integrate them, how to cross sell and increase revenue. And the last time we spoke, we talked about well what is the big risk here and one of the risks which I think will continue to be a risk over time is that, you know, we make a bad acquisition. We buy a company, and like I kind of said, we buy a company and it turns to sand. We’ve made four acquisitions. All four of those acquisitions have turned out well and our executive team has integrated them and, you know, increased revenue, increased margins and so we’re getting better with de-risking that potential, but we’re going to keep buying. We have 11 deals in our pipeline. I think we’ll close five deals in the next year in 2015.

James West:           Wow.

Michael Dalsin:       That’s our goal. Those deals are about $10 million to $15 million of revenue each. As I said, we’re in about a $40 million run rate so our goal a year from now, and I’m sure we’ll have [inaudible 00:05:04] so we’ll see what our goal, you know, what kind of achievements we’ve made. But our goal a year from is to get about $80 million in sales…

James West:           Oh.

Michael Dalsin:       …and I think we can do that quite easily with the inorganic side. And with our organic growth reaching into the 40% annually, you know, we might even be closer to 100% so that’s where we are today. It’s the same, you know, it’s the business model that it was six months ago thankfully and we’ve just done more of it and that’s reflected in the revenues, and the EBITDA, and the profits.

James West:           Sure. Okay. So is your acquisition strategy based on – do you use primarily the company stock to make acquisitions, do you use cash and stock? I’m wondering how diluted a continuous acquisition will be to the run rate, to the free cash flow.

Michael Dalsin:       That is a great question. And in fact one of the reasons I like answering that question is because our capital structure is really well positioned to make these acquisitions. We have over $20 million in cash. We’re throwing off certainly over $750,000 in cash flow every month. Now some of that cash flow we’re using to buy meters and to buy equipment that’s goes into the patients’ homes, but we do have free cash flow and our cash flow depends on how much we grow every quarter. The more we grow, the less free cash flow we have because we’re investing in CAPX, but we are in a very good cash position. That being said we still like to do deals where over 50% of the deal is in stock. Now, we like to do that for a couple of reasons. One, we like to do that because we retain the talent, we retain the parties who run the business, and the people who run the business they have a good understanding of their market. They know how to sell their particular technology or their device if you are an existing database and we feel like just from the continuity of care for our patients it’s important to have those sellers remain for at least a year if not two years. Now and I’ll give you an example. We’re paying four times the EBITDA which is generally a good average for us. We might buy a business with say $1 million of EBITDA, we’ll pay $2 million in cash and $2 million in stock, but the stock will be the prevailing [inaudible 00:07:20]. I think today we’re trading at about 70¢. So if you think about that, you know, we’re giving away, you know, 3 million shares. We have about 175 million shares outstanding. So to take our $10 million EBITDA business today and do a $11 million EBITDA business, we’re increasing EBITDA by 10%. That doesn’t include any of the organic growth, it’s just inorganic addition, but we’re not going to dilute shareholders by 10%. You know, we’re going to give away 3 million shares out of 175 which, you know, by my math is about 3% so the EPS still goes up. Our earnings per share with re‑acquisition goes up and then we get another pop at EPS over the six to nine months after we own the business in the organic [inaudible 00:08:01, post?] side to the cross sells.

James West:           Uh-huh. So I guess – well, I guess it’s obvious that that’s the case because you can see it in the rising share price. Now does your business model and your acquisition strategy actually get stronger as your share price rises? I’m assuming that must be the case. It’s like the power of your currency going way up relative to the currency of the people you’re acquiring.

Michael Dalsin:       Yes, that’s right. I think we get [inaudible 00:08:26] in a number of different problems. One, I think our multiple goes up because of our growth and so the arbitrage of what we’re buying versus what we’re trading at definitely increases. I think the second thing that is really exciting is that every time we buy a company we buy it for both its database as well as its technical trellis or its expertise in a particular type of technology. So every time we buy a company not only are we growing our patient database, but we get to go back to our existing patient database and sell that new service line so we’re really getting exponential growth there. That’s where a lot of our data growth comes from. So every time we buy a company we’re seeing kind of, you know, an inorganic growth, organic growth through selling it to their database and then organic by taking their services and selling them to our existing database so that gives us a big pop. And the third thing which I think is an important concept here is, you know, once we get to like $25 million in EBITDA which we can easily do with our balance sheet we will start issuing the dividend.

James West:           Wow.

Michael Dalsin:       So at this particular point, we do not plan to ever raise more money. We are, you know, fortunate enough to be kind of washing cash. We have plenty of cash in the balance sheet, we’re growing off cash flow, we have some warrants outstanding at 45¢, about 10 million warrants outstanding at 45¢. We will get back $4.5 million in – those expire in August of next year so we’re well through the overhang there. They’re at 45, we’re over 70 so we have plenty of cash and we will continue to buy small companies. You know, the one thing about this market is that we have no competition for buying $10 million to $20 million in business. And once you get over $20 million most of those businesses have already figured out how to cross sell so they’ve taken what I call the juice out of the deal. They figured out how to maximize for patient revenue. So we like the smaller deals, we like the smaller companies, they trade at a low multiple, we don’t have competition, and if we can do four or five/six of those a year at $25 million EBITDA we actually will throwing off more cash than we can use. Remember, we’re close to $10 million so we can buy easily another $10 million inorganically with our cash. That would only be about $20 million in cash and then on an organic basis we can grow that $20 million we think closer to $30 million. So as we look over the next 12 months, 18 months, 24 months we do see the high probability that we become [inaudible 00:10:57] and we’re building more cash than we can use. And I just – actually I should note I just acquired at 55¢, 1.99 million shares so about 2 million shares I acquired recently and so I’m continuing to build my position. I’m very happy the stock price is about 55¢, but I continue to pile onto my position and the only real way for me to exit personally is I’m the chairman of the board is either to sell the company and I don’t think that’s going to happen for some years until we hit the $300 million or $400 million in sales or to issue a dividend. That’s the only way that I can get, you know, any kind of return off of this and that’s our plan. We would like to become a dividend yielding stock and start giving back to the shareholders their investment.

James West:           Oh, so you’re rather profoundly motivated to start paying y our dividend.

Michael Dalsin:       Exactly.

James West:           That’s great.

Michael Dalsin:       Exactly right.

James West:           Okay. So Michael let me ask you where is the risk to your business model? What can derail you, what might keep you awake at night?

Michael Dalsin:       Well, of course, it’s [inaudible 00:11:59] is making a bad acquisition is the [inaudible 00:12:02] is you buy something and it’s not what you thought it was and frankly every time we buy something it’s not what we think it is. It’s always – you find out the truth the day after you buy it and it’s always as I say a question of what is the fix, how long, and how much money does it take to fix the business that you bought. So that’s certainly one of the things that keeps me up at night, but I feel like every acquisition that we do de-risks that. You know, the 10th acquisition, the 12th acquisition. A bigger business can endure a bad acquisition especially if it’s [inaudible 00:12:33] so that’s certainly something that keeps me up at night. I do – well, I’ll show concern myself with how quickly, you know, we can integrate these businesses. I think there’s so many of them out there that we can buy them more quickly than we can integrate them so I’m happy that we have a long-term management team. [Inaudible 00:12:52] promote this management team into an executive role. Right now I’m chairman and CEO. One of my endeavors in 2015 is to get David Hayes who’s really the VP of sales and [inaudible 00:13:02] the revenue and the cross selling into the CEO position. He’s been with us for a year and he formerly was the president and, you know, was our CFO for a while. I want him to get him, to keep him, and keep him engaged. So I feel like, you know, our operating team is going to get more in control of this business as it becomes more of an operating business. Reimbursement cuts always are issues in U.S. healthcare and the U.S. government really sets prices. And generally speaking they’re not raising prices, they’re lowering prices over time so that worries me at times. So, you know, we are – I always worry about having a quarter that isn’t going to be as great as the quarters we’ve had. We’ve had now seven and we’re in the middle of our eighth quarter of really good profitability and profit growth. I do imagine a day where we don’t have a blockbuster quarter and, you know, working with Harold to help us understand why that is. I kind of worry about that every quarter we have. Is this going to be the quarter that we don’t have double digit or triple digit growth. So far we’ve been lucky that that hasn’t happened. But I don’t see any major issues – any major headwinds for us. We don’t have real competition good enough to be able to integrate four businesses pretty much. We have, you know, more than 40% organic growth. Our EPS is growing, we got $20 million plus cash in the bank. You know, things seem pretty rosy right now. I imagine there’ll be an interview where I’m explaining why things aren’t rosy, but I’ll enjoy the moment…

James West:           Right. Okay. Finally, Michael, I’m curious, in terms of control of the company what is the risk that an opportunistic predatory larger say HMO comes along and takes a hostile run at you. Are you guys in the position where you can fend that off?

Michael Dalsin:       Well, you know, hostility is all relative to pricing, right. I mean if somebody wants to come in and buy us for $1.80, I don’t know. They cease to be hostile in my mind.

James West:           I see.

Michael Dalsin:       You know, my position right now is 8.8 billion shares out of about 170, I feel like I’m going to continue that because that’s not my plan not from the perspective of keeping control just because I feel like it should be a $3 or $4 stock over time and I feel like it’s a good investment at 50¢, 60¢, 70¢. Do I think someone will come in offers, yeah. Again, we’re a service business and our management team including me are pretty key to keeping this thing growing at least in the early stages so I don’t worry. You know, what I worry about every day is making sure that our sales grow, our EBITDA grows, our costs are contained, we’re operating efficiently, and that we’re buying the right kinds of businesses. I frankly, and this is a big issue with a lot of our shareholders, I don’t really pay attention to the stock price. I will say I pay a little bit of attention when I bought some stock at 55¢, but at the end of the day my view is as long as the underlying asset is improving and I’ve got EPS growth every quarter and I’ve got revenue growth every quarter and I’ve got profit growth every quarter, you know, everything else will sort itself out in a way that is my benefit as a large shareholder and that’s the way I think about it.

James West:           Well, that’s great, Michael. You’re doing a fantastic job. We wish you the best and hope you’ll keep going and we’ll check in with you again in a few months and see what the share price is then. Thanks for joining us today.

Michael Dalsin:       Thanks, Jim.

James West:           Thank you.



James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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