First Stock: 10 years of consolidation, now with a 2% return (NASDAQ: PINC)
Although not a famous title in all respects, Premier Inc (NASDAQ: PIN), a healthcare services company, has been in business for over 20 years, with an IPO in 2013. Although initially a group purchasing organization (GPO), an entity that helps reduce costs by aggregating the supply chain, they have now become a diversified provider of a wide range of services. Other elements include providing software for analysis and operations, consulting and collaboration expertise, and even advocacy services in Washington. Currently, supply chain services remain the dominant revenue segment, accounting for over 60% of revenue. However, moderate growth over the past decade has prompted the company to attempt to make the performance services segment a larger proportion of revenue. Will this change finally be enough to get the company out of the nearly 10-year consolidation pattern it has known?
As the second largest GPO in the United States in terms of staffed beds, PINC generates over $1.0 billion in revenue annually. However, their revenue depends on the overall health of the industry, and issues with pricing and supply logistics, tax and personal expenses, and events such as COVID all play a role. As such, one of the main risks is lower healthcare spending as COVID has weakened the financial strength of the industry. General market pessimism has and will continue to affect both Premier’s valuation and growth expectations.
Fortunately, the forecast for 2022 has increased since the last results compared to the fall of 2021. It seems that inflation does not play a significant role when it comes to the finances of the company, but that might not help the company. company to improve from its current trend. However, 2022 will be a weaker year for revenue due to the end of a pandemic boost, and management guides for a roughly 16% decline in growth. Let’s start diving into the finances.
On paper, Premier looks pretty solid, with steady revenue growth. the drop in income in 2019 was associated with changing revenue recognition standards and the sale of their specialty pharmacy businesses. The sale is reflected in the revenue data summary. Then, revenues increased sharply thanks to the pandemic. Along with steadily increasing revenues, the company boasts strong profitability, with net profit rarely negative. However, a glaring weakness of the company is its inability to maintain profitability alongside revenue growth. This is likely due to both industry issues and increasing CAPEX in software systems.
The downward trend is not a good look and is a major reason to consider passing the stake. If you own stocks, you can feel comfortable that the NI margin remains much more stable (possibly growing) than the EBITDA margin. I’m also quite pessimistic and the downward trend in EBITDA from around 30-40% to 20-25% is not extreme. It will simply be essential to be wary of this scheme in the future. In fact, this change in profitability can also be attributed to the rise in high net income.
Due to weak revenue growth and slowing profitability, the balance sheet is weakening quarter over quarter. Another way to measure declining profitability is the downward trend in free cash flow per share. Since the company bought stock, without diluting, you would expect at least a slight growth in FCF.
Without diluting, the company increased its total debt in 2020, but has already started paying it down. Net debt is currently $335 million, so it will take some time to fully pay off current EBITDA margins. Unlike performance, the company has initiated a dividend in 2020. Is it worth going into debt just to buy back shares and initiate a dividend? In the eyes of most people, the current payout rate of
As one would expect given the lackluster performance of the past decade, little change in stock price or valuation has occurred over the years. Arguably, the company is now at its most overvalued point considering negative earnings and a high price-to-stock ratio. However, there is a lot of uncertainty in the market and a company like Premier is a prime candidate to find some security. I expect the P/E to stay around 16x, but I will be looking for the P/S to fall below 2.8x. Whether the stock price will rise with earnings while this is happening is uncertain, I find this market favors a rapid decline in the stock price.
Premier is a pretty unique look in today’s healthcare market outside of insurers and pharmaceuticals. They offer slow growth, but huge overall profitability and a relatively high dividend. For low-risk investors, this can be a great way to learn about the healthcare services industry, aside from your typical name like CVS (CVS) or Cigna (CI). It will be important to watch profitability over the next few years as the healthcare industry find the balance in the later stages of the pandemic. Expenses will not be as high as last year, and this is reflected in the current forecast for 2022 which calls for a 16% year-on-year decline in revenue.
This misdirection shows how the company is still tied to the overall state of the healthcare industry and how the Performance Solutions segment has failed to find new avenues for growth. I want the segment to be able to drive growth at a fairly rapid pace. Unfortunately, this is not the case at the moment, but the company has an ace up his sleeve: PINC IA. This new software service could be the subscription service Premier needs to deliver stable and predictable earnings growth in the future. Since the service just released in 2022, I’ll give it some time to think about finances.
While dividend seekers may start stocking up on stocks now that they’ve fallen 10% from recent highs, I find the consolidation phase will continue for at least 2022. This trading pattern of almost ten years between $20 and $40 per share faces headwinds from slowing revenue and EBITDA growth. All eyes will be on the bottom line as investors look to a safe dividend and reduced debt. The company is certainly worth considering for share price safety for those who want capital coverage. I hope this article provides the initial information needed to lead you to your own conclusion.
Thanks for reading and feel free to share your thoughts below.