[final] usph slides-utd

CFA INVESTMENT RESEARCH COMPETITIONSOUTHWEST REGIONAL FINAL PRESENTATIONS - USPH

EXECUTIVE SUMMARY

PHYSICAL THERAPY INDUSTRY OVERVIEW

COMPETITIVE POSITIONING & STRATEGY

FINANCIAL ANALYSIS & COMPARABLE MULTIPLES

VALUATION & INVESTMENT RISKS

CONCLUSION / Q&A

Outline

o Largest public pure-play physical therapy company in the U.S.o Over 525 clinics in portfolioo 98% of total revenue is patient revenue

• 140% growth last 10 years• 94% is paid by 3rd party payors

USPH is a strong growth company, but it is currently overvalued

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS

POSITIONING& STRATEGY VALUATION INVESTMENT RISKS &

CONCLUSION

MARKET DATA (finance.yahoo.com)

CLOSING PRICE (2/23/17) $74.70

52 WEEK HIGH / LOW $45.76 / $76.25

AVERAGE VOLUME 63,116

SHARES OUTSTANDING 12.52 M

MARKET CAP $935.39 M

BETA 0.98

DIVIDEND YIELD 0.91%

TRAILING P/E RATIO 38.70x5/2

9/92

4/1/9

3

2/1/9

4

12/1/94

10/1/9

5

8/1/9

6

6/1/9

7

4/1/9

8

2/1/9

9

12/1/9

9

10/1/0

0

8/1/0

1

6/1/0

2

4/1/0

3

2/1/0

4

12/1/0

4

10/1/0

5

8/1/0

6

6/1/0

7

4/1/0

8

2/1/0

9

12/1/0

9

10/1/1

0

8/1/1

1

6/1/1

2

4/1/1

3

2/1/1

4

12/1/1

4

10/1/15

8/1/1

6$0

$10

$20

$30

$40

$50

$60

$70

$80

22.7% 28.3% 24.5% 18.5% 6%

USPH Revenue by Payor (2015 10-K)

Manged Care Programs Commercial InsuranceMedicare/Medicaid Workers' Comp.Other

TEAM PRICE TARGET: $58.24

CURRENT MARKET PRICE: $74.70

1

Physical therapy industry is poised for continued growth the next several years

Cons Pros

Payor Cost Advantage

PT Awareness

Demographics

Regulation

19501960

19701980

19902000

20102020

20302040

20500%

5%

10%

15%

20%

25%

Population % 65+ (census.gov)Historical Projected

56% Growth

from 2010

EXECUTIVE SUMMARY INDUSTRY OVERVIEW FINANCIAL ANALYIS

POSITIONING& STRATEGY

VALUATIONINVESTMENT RISKS &

CONCLUSION

2

Industry projected to grow at a 1.6% CAGR over the next 5 years to almost $32 billion

20072008

20092010

20112012

20132014

20152016

20172018

20192020

2021$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

-4%

-2%

0%

2%

4%

6%

8%

10%PT Industry Revenue in Millions (IBIS World)

Projection Historical Growth %

PT In

dust

ry R

even

ue in

Mill

ions

Reve

nue

Gro

wth

Rat

e

Slowing Growth Rate is a Sign of a Maturing Industry, Industry Consolidation Usually Follows

3.6% CAGR ‘07-’16

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

3

Health-South; 13%

Kindred; 5%

Select; 3%

USPH; 1%

Other; 78%

Industry Revenue by Market Share (IBIS World)

PHYSICAL THERAPY

$29.5 BMARKET SIZE

Highly fragmented industry presents opportunity to consolidate and capture market share

Kindred Select USPH HealthSouth

$652

$1,972

$899

$3,753$3,982

$4,916

$974

$6,984

PT Industry Players in Millions (Capital IQ)

Market Cap Enterprise Value

Specialty Hospital Operators

Inpatient Rehab Hospital Operator

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

4

Being a pure-play firm, USPH trails in gross margins, but excels in profit margins due to management’s consistency

2013 2014 20150%

10%20%30%40%50%

35% 36% 36%44% 46% 43%47% 46% 42%

19% 19% 16%25% 25% 24%

Gross Margins

Tenet Healthcare Kindred Heathcare HealthSouthSelect Medical USPH

2013 2014 2015

-5%-3%-1%1%3%5%7%9%

11%13%15%

-1%

0%

-1%

-4%-2% -1%

14%

9%

6%4% 4% 4%

5%7% 7%

NI Margins

Decrease in margins due to increasing salary obligations

20112012

20132014

20152016

0%

5%

10%

15%

20%

25%

30%

USPH MARGINS

Gross Profit EBITDA EBT NI

Screening criteria in Appendix 12 of report

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

5

Industry players mostly finance using debt; USPH uses equity & cash flow

2013 2014 20150

2

4

6

8

10

12

14

16

Liabilites-to-Total Equity Ratio

Tenet Kindred HealthSouthSelect Medical USPH

2011 2012 2013 2014 2015 20160%

10%20%30%40%50%60%70%80%90%

100%

10% 9% 10% 10% 7% 8%16% 12% 20% 18% 21% 20%

66% 68% 57% 60% 58% 56%

9% 10% 12% 12% 14% 16%USPH Balance Sheet Breakout

MINORITY INTERESTS TOTAL EQUITY TOTAL L-T LIABILITIESTOTAL CURRENT LIABILITIES

USPH has Strong Debt Coverage & Liquidity Ratios

CURRENT RATIO – 2.7x

COMPS – 1.24x

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

6

Operationally, pure-play PT clinics are more efficient and require small capex investment

2013 2014 20150

10

20

30

40

50

60

70

80

90

Operating Cycle (Days)

TenentKindred

HealthSouth

Select MedicalUSPH

2011

2012

2013

2014

2015

2016

$18.9m

$17.2m

$13.9m

$15.9m

$26.2m

$28.3m

$8.1m

$8.3m

$47.9m

$12.7m

$20.8m

$24.4m

$3.2m

$4.2m

$4.6m

$5.2m

$6.3m

$7.5mUSPH Operating Expenditures

CapEx

Cash Acq.

NWC

• Capex supports De Novo clinic growth

• Acquisitions are an active part of USPH’s strategy

• NWC supports all

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

7

USPH is positioned to take advantage of market fragmentation via acquisition strategy

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -

10

20

30

40

50

60

$0

$50

$100

$150

$200

$250

$300

$350

Patient Revenue De Novo Acquired Closed Total Clinic Δ

Clin

ic #

Reve

nue

in M

illio

ns

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

8

M&A goal is to acquire strong clinic groups at attractive valuations using cash flow and revolver

2011 2012 2013 2014 2015 20160.0m

0.2m

0.4m

0.6m

0.8m

1.0m

1.2m

0.4m

0.6m

1.1m

0.6m

1.0m 1.0m

Cost per Acquired Clinic

Cost per clinic acq Average

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

2007 2008 2009 2010 2011 2012 2013 2014 20150m

20m

40m

60m

80m

100m

120m

140m

160m

180m

Total Financing and Acquisitions

Operational CF Revolver Cash Acq.

Aug. 27th,200

7Original 4-Year Credit Agreement of revolving

credit

Oct. 14th,2010 Extended

Term of $50MM Credit Line

through August 2015

Jul. 14th,2011 Increased

Credit Line to $75MM in

August 2015

9

Dec. 6th,2013 Amendmentthrough November 2018

Company Overview Industry & Competitors

ConclusionRisk AnalysisValuationFinancial Analysis

D

D

Management is conservative, yet opportunistic; they will take advantage of current environment

STAR Acquisition

2007

51 Clinics$23 Million Price$19 Million Cash 6/1

/14

8/1/1

4

10/1/1

4

12/1/1

4

2/1/1

5

4/1/1

5

6/1/1

5

8/1/1

5

10/1/1

5

12/1/1

5

2/1/1

6

4/1/1

6

6/1/1

6

8/1/1

6

10/1/1

6

12/1/1

6

2/1/1

70K

20K

40K

60K

80K

100K

120K

140K

160K

$0

$10

$20

$30

$40

$50

$60

$70

$80 Stock Price

USPH Insider Holdings vs. Stock Price

# Sh

ares

Hel

d

Stoc

k Pr

ice

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

10

2016Amendment to

Credit Agreement

2017Aggressive Acquisition

Moderate De novo2018

Obligation due

Higher Interest rate

Acquisition Growth

Revenue Growth

Net Income Growth

Credit Growth Integration

De novo growth

USPH follows a predictive growth cycle; we project the recent increase in credit growth to boost near-term acquisitions

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

11

Revenue Growth

Change inClinic Amount

Change inPatient Visit/Clinic

Change in Net Rate/Visit

De novo

Clinics

AcquisitionClinics

20062007

20082009

20102011

20122013

20142015

F2016

F2017

F2018

F2019

F2020

-10

0

10

20

30

40

50

60

-5%

0%

5%

10%

15%

20%

25%

30%Projected Acquired ClinicsHistorical Acquired ClinicsProjected Revenue Growth RateHistorical Revenue Growth Rate

# of

Acq

uire

d Cl

inic

s

Reve

nue

Gro

wth

Rat

e

Year 2013 2014 2015 F2016 F2017 F2018 F2019 F2020Revenue Growth

Rate6.10% 16.15% 8.55% 7.80% 8.30% 15.00% 8.00% 8.00%

Revenue growth is a function primarily of acquisitions

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

12

2016-2017 2018-2020

8.7%0 100%

50%

25% 75%

10%

8.1%0 100%

50%

25% 75%

5%

Cost of Debt

Cost of Equity

Cost of Debt Cost of Equity-1.00%

1.00%

3.00%

5.00%

7.00%

9.00%

3.05%

6.44%

Cost of Debt Cost of Equity-1.00%

1.00%

3.00%

5.00%

7.00%

9.00%

2.47%

5.94%

8.41%9.49%

Cost of Debt

Risk free rate

MRP*beta2.60%3.10%

Chang inAccounting Guidance

WACC will change in 2018 due to credit agreement and GAAP

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

13

4%Growth Rate

of FCF after 2020Acquisition Growth Scenario

2 Stage WACC

NPV of FCF from 2016-2020

3%Growth rate

of FCF after 2020 De novo Growth Scenario

$58.13

$63.00

Two Scenarios under 3% and 4% terminal growth rate

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

14

Price: $58.85

2013 2014 2015 F2016 F2017 F2018 F2019 F2020After 2020

(SGR)Dividend

Payout Ratio37.7% 28.3% 33.2% 33.2% 33.2% 33.2% 33.2% 33.2% 33.2%

Projected ROE 11.9%Dividend

Growth Rate 11.6% 22.9% 25.4% 21.4% 10.6% 18.0% 17.4% 10.1% 7.9%

2013 2014 2015 F2016 F2017 F2018 F2019 F2020 After 2020

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

7.9%

Dividend Growth Rate

Dividend payout is projected to remain constant at 33.2% and we arrive at a price target of $58.85

EXECUTIVE SUMMARY

INDUSTRY OVERVIEW

FINANCIAL ANALYIS


CONCLUSION

15

11.9x 10.2x

80.69% 76.11%

14.1x 10.7x

67.19% 74.64%.

19.5xEBITDA

Multiple

15.46%Debt/Capital

• Circles Indicate Capital Structure• Business (USPH is the only one to

operate pure physical therapy rehabilitation services;

• Overvalued (all the multiples)

Multiples valuation shows USPH is more highly valued than its peers based on EV/EBITDA; USPH is overvalued




CONCLUSION

16Data Date: Feb. 23th, 2017

Sell Hold Buy

67% 27% 6% Input to simulations:• Long-term growth

rate• WACC• Tax Rate• 100,000 Trials

Mean: $ 60.02Median: $ 58.17

Monte Carlo simulation gives a 67% probability of a sell recommendation, 27% hold and only a 6% buy




CONCLUSION

17

40%

20%DCF:

Acquisition Growth Scenario

40%

DDM20%

40%

DCF:De novo Growth Scenario

40%

$58.13 $63.00 $58.85

Target: $58.24

$74.70

Market

Date: Feb. 23th, 2017

DDMDCFAcquisition

GrowthScenario

DCFDe novoGrowthScenario

$58.85$63.00

$53.18

Target

$58.24

We use a weighted approach to discount rate, arriving at a price target well below current market values




CONCLUSION

18

Market risk constitutes the largest section of investment risks; economic and operational risks are key as well

High

MR-PE* OP-PT

Moderate OP-WT

EC-UN MR-MD* MR-RB*

Low MR-RG* OP-LQ*

Low Moderate High

HIGHLIGHTS• MR-RG Regulation, Reporting & Confidentiality• MR-RB Reimbursement• MR-MD Medicare/Medicaid• MR-PE Private Equity Players• OP-LQ Liquidity Crisis

Probability

Impact

Market Risk

Operational Risk

Economic Risk

- *Denotes in Highlights- Full Risk section in Report on page 9




CONCLUSION

19

CFA INVESTMENT RESEARCH COMPETITIONSOUTHWEST REGIONAL FINAL PRESENTATIONS - USPH

[final] usph slides-utd

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