Why I bought Medical Facilities Corp and Shopify – Part I

Recently, I bought Medical Facilities Corp (TSE: DR) and Shopify (TSE: SHOP, NYSE:SHOP). The following is my analysis as to why I bought them. I have covered my Shopify purchase in part 2 of this article here.

Facilities Corp (TSE:DR):

Quick Facts

Industry: Medical Care

Sector: Healthcare

10 year return (ROE): 7.7%

S&P 500 return: 9.6%

Type of buy: Defensive and speculative

Dividends: $1.125 paid out annually(on a TTM basis); 0.09375 on a monthly basis.

Payout ratio: 85.5%

While the payout ratio is high for my liking, the recent trend has been declining. Also, the company is structured to return its profits to its shareholders in the form of dividends. Logically, the payout ratio would be high because that is essentially how the company is returning money to its investors. What’s more, the dividend yield when I bought this stock was approximately 9%. Add to that, the stock price was hovering at its 52 week low. The last time it was trading at that price was in 2015. Yes, it may seem unstable but the inherent reasons were different. I found Mr. Market was acting different and this was a perfect buying opportunity to initiate a position.  

On June 12, 2017, the company President and CEO (same person) had announced his resignation. Obviously, the market got nervous. The stocks plunged from approximately $16.37 to $11.14 in about 2 months. The fundamental performance of the company did not change, nor was there any external threat, or worsening credit situations.

It seemed like a perfect time to buy – the stock was trading at its 52 week low. Also, I strongly believe in the, “Buy when others are selling”. This stock met the criteria.

Price

  • At the time of purchase the stock was bought at $12.45 (including commissions). As mentioned, the stock had recently hit a 52 week low, and the dividend yield was 9% approximately.  Then, I added more to the position when it was priced at around $15.02.
  • The company’s way of compensating investors is by paying dividends, hence the payout ratio is high.
  • The stock went down from $19 to $11 approximately in a period of 5 months.
  • Nothing significant changed about the business. Heck, having hospitals run smoothly is not dependent on the management personnel changes. It relies more on patients and doctors than a change in the leadership management.

Business Model

  • Medical Facilities own controlling interests in 5 surgical hospitals in USA.
    • The specialty hospitals perform scheduled surgical, imaging, diagnostic and other procedures, including primary and urgent care, and derive their revenue from the fees charged for the use of their facilities.
    • In addition, Medical Facilities owns controlling interest in a diversified healthcare service company located in Oklahoma City that provides third-party business solutions to healthcare entities such as physician practices, facilities, and insurance companies.
  • The revenue and profitability of the Centers is dependent upon physician relationships. Chances are the physicians have a profit sharing deal with the Medical Center. This can also be a potential risk as the physicians might go to the competitors or decide to go elsewhere, while leaving the Company in search of an efficient replacement with a positive overall review.
  • Recently acquired Prairie States Surgical Center in South Dakota in late 2016. They acquired a controlling interest in other hospital earlier in 2016. Such events suggest that the management is keen on growth, and future acquisitions are just as likely. All of this is great news for shareholders as this company seeks to expand its footprint.

Fundamentals

  • Revenue: On a 10 year trend, revenues have been increasing.
  • Operating Margin %: Even though the 10 year Operating Margin% has been decreasing, a lot of it would be to do with the fact that they’ve recently acquired stakes in other hospitals. Even then, a 20% Operating Margin is healthy.
  • Net Income: The Net Income has been all over the place in the past 10 years. However, recently it has returned to a positive numbers from 2012. Considering this is a 500M market cap company, I am not too worried.
  • Market cap: 453M; a small cap company. Something that fits my investment criteria.
  • Price to Book value: Currently, the company trades at approx. 2.5X the book value. Considering how the overall American market in general is trading at 4-5X the book value, this is okay.

Concluding Thoughts

  • I have been keeping an eye on this company for a long time. I knew their fundamentals did not scream out a BUY NOW for me, when their stock was trading at $20 price levels. However, with the stock hitting a 52 week low and at $12, I knew this was too good of an opportunity to pass up on.
  • Even then, I decided to be cautious and it does not constitute a significant percentage of my portfolio holdings.
  • I wanted something that paid out dividends and had a growth aspect to it. This company fits that criteria perfectly.
  • If the stock price decreases back to the $12 levels, I would considering adding to my position aggressively.
  • To find out more about how I pick my stocks, or my philosophy behind it please read the following articles:

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