CRH Medical: Gastrointestinal Niche

11/03/2016 9:00 am EST


Shawn Allen

Contributing Editor, Internet Wealth Builder and The Income Investor

Despite the head office being in Vancouver and despite trading primarily in Toronto, investors should view this as a US company since all of its revenues and the great majority of its costs occur in the US, explains Shawn Allen, contributing editor to Internet Wealth Builder.

CRH Medical (Toronto: CRH) is a medical products and services company founded in 2001.

This is a small firm with only 16 full-time employees plus over 50 contracted personnel. Annual revenues are running at $56 million.

In the first half of 2016, 83% of revenues were derived from its anesthetic services business. CRH provides these for gastrointestinal endoscopic procedures on an exclusive contract basis to ambulatory (walk-in) surgical centers. At the end of 2015 it provided services at 18 surgery centers.

The remaining 17% of revenues were derived from the company's longer standing business of providing gastrointestinal physicians with a patented single-use disposable hemorrhoid-banding product.

The company markets direct to physicians and at the end of 2015 had trained 2,175 physicians in 811 clinical practices to use its banding system.

Starting in late 2014, the company raised substantial amounts of debt and equity capital and greatly expanded the revenue and scope of the business through a growth-by-acquisition strategy.

Its December 2014, a $66 million acquisition of an anesthetics business was transformative as assets increased from $11 million to $79 million.

This was followed by the acquisition of from 51% to 100% of four anesthetic companies in 2015 for cash totaling $19 million, financed largely by debt plus a modest equity issuance.

In 2016, the company purchased 51% to 65% of three additional anesthesia service providers for a total of $34.5 million paid by cash (and deferred cash in one case). The purchases were financed largely with debt.

The price-to-book value ratio, in isolation, is not attractive at 6.3 and the tangible book value per share is negative. And, based on adjusted earnings, the p/e ratio is ostensibly not attractive at 38.

However, revenues and earnings have recently been growing very rapidly. And, the adjusted return on equity is very strong at 18%. CRH is "pricing in" considerable growth.

The company appears set to continue growing through acquisitions. The stock is a buy for investors willing to accept the risks associated with this small company.

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By Shawn Allen, Contributing Editor to Internet Wealth Builder

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