Mammograms Without Borders

12/22/2009 12:01 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

This radiology provider has thrived on Canada's socialized system and is now making profitable inroads in the US, writes Roger Conrad in Canadian Edge.

One group of companies looks ready to profit regardless of how the details on [US health care reform] shake out: Canadian providers of health care products and services.

Unlike the US, Canada’s health insurance system has been run for decades by Ottawa. Many of its essential functions are provided by private enterprise. The companies compete with each other for business.

The winners enjoy some of the most secure revenues of anywhere on the planet. Further, as is the case with government contracts worldwide, once they’re on top, they tend to stay there.

CML HealthCare Income Fund (TSX: CLC-U, OTC: CMHIF), for example, has been able to grow its revenue by 8.7% over the past years. The company has been in business 35 years, growing into one of the country’s largest providers of medical imaging and radiology services. It now has over four million patients and partnerships with some 25,000 physicians on both sides of the border.

The company’s primary business is in Canada, where it still garners 70% of revenue. Management continues to see numerous opportunities in its home country, an assertion backed by the 9.6% boost in third-quarter revenue over [the previous year].

The US, however, is where CML’s real up side is. This year the company added to its holdings with the acquisition of two medical imaging operations comprising six centers in Rhode Island and Maryland. Both are expected to be immediately accretive to earnings—a key requirement of management—when they close in coming weeks. And that’s before the impact of 30 million more insured Americans coming on the rolls. Margins on all of these businesses are expected to be in excess of 20%.

Diagnostic services for women recently emerged as a major issue in the US health care debate, [adding] considerable funding to the working legislation. Here, too, CML is well ahead of the game with plans to deliver a much broader range of diagnostic services targeted at [women].

One key area is digital mammography, which was specifically targeted by several US senators in the debate and the demand for which continues to grow, particularly for women in their 40s. The result will be higher profit margins for US operations, which already rose to 13.3% of revenue from 11.9% a year ago.

Third-quarter cash flows covered distributions and capital expenditures by a comfortable margin, with a payout ratio of 83.8%. And the ratio should continue to drop in coming months as new revenue streams are added while costs and debt (down 2.9% the last 12 months) are reduced.

With management restating its commitment to dividends and on a clear path for growth, there’s a lot of room for upside surprises. CML HealthCare Income Fund is a buy up to US $13 for conservative and aggressive investors alike.

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