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ConMed (CONM) -- Research

ConMed (CONM) -- Research

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Published by Dan Trang

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Published by: Dan Trang on Dec 28, 2012
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12/28/2012

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Dan D.

Trang Conmed Healthcare Managment Ticker: CONM
DATE: April 27, 2012 PRICE: $3.40 MARKET CAP: $46.28 million Shares Outstanding (non-diluted): 13.6 million

CONMED SELECTED FINANCIAL DATA
Revenue (MM) $40.6 $52.8 $60.7 $69.4 $72.1 Operating Income (MM) $(1.1) $1.0 $2.5 $3.1 $2.9 ROE (%) (6.0)% 0% 8.2% 13.0% 10.4% ROIC (%) (7.4)% 0.0% 7.3% 9.1% 12.99% Net Income (MM) $(0.9) $(0.0) $1.5 $2.5 $2.3 Diluted S/O(t) (MM) 12.1 12.6 14.3 14.5 14.2

2008 2009 2010 2011 2012 (ttm)

Diluted EPS $(.08) $0.0 $0.09 $0.13 $0.11

Investment Thesis ConMed (CONM) is a healthcare management company that provides their services to country and municipal detention centers. ConMed is a well capitalized company with zero long term debt and consistent revenue growth the past five years. It has a management team that is aggressively expanding CONM services in Texas and Virginia. With a market capitalization of $47.15MM, there is little competition regarding institutional shareholders. In early 2012, management hired Cantor Fitzgerald, the financial services firm, to advise regarding strategic initiatives. A reasonable private-market value for CONM would be $4.00 to $5.00 depending on the buyer. This is based on a comparable acquisition of a company that didn’t have the optimal capital structure of CONM. They either be bought by a strategic buyer (which will lead to higher premium), or CONM’s management will get the financing to buy the company themselves and take it private. Company Overview CONM provides healthcare services to county and municipal detention centers across the United States. They provide a range of services that include general healthcare services, acute care services, surgical services, laboratory services, intravenous therapy, electrocardiograms, dialysis services, hospital services, mental health services, pharmacy, physical therapy, and dental services. It provides services to over 40 counties in Arizona, Kansas, Maryland, New Jersey, Oregon, Tennessee, Virginia, and Washington. In 2012, it made an aggressive effort to enter Texas by acquiring a company, Panhandle Correction, in Amarillo, and by opening a new account in the County of Galveston, Texas. Company Risks and Industry Competitors Municipal budgets are under scrutiny as their budgets face shortfalls. CONM could face pressure on revenue if the municipalities allocate less money on their prisons. However, this also feeds directly into CONM’s value proposition. Under the Eighth Amendment, governments are required to provide care for prisoners. In most cases, municipalities contract with local physician sand a hospital to provide care. The local physicians and hospital may have an inefficient process of evaluation and treatment which lead to increase costs for the municipalities. CONM is able to

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management also announced that they would initiate a stock buyback of $5MM.31/day. for $250 MM in 2011. This is based on a conservative estimate that doesn’t include the new accounts in Texas that would increase their EBIT. the price of CONM is an attractive entry point. 2 .80 per share by Ayelet Investments. 2012. the price could go as low as $3. While this cuts into the margins of CONM. Last year they engaged Gleacher and Company to explore different opportunities for the company that resulted in an offer of $3.4MM in cash which equates to $1. the president has assured shareholders that he will not sacrifice the quality of healthcare provided to win a contract despite aggressively bidding for new contracts. the company currently trades at 9.optimize the cost of each prisoner by streamlining the process of having all providers and back office under one umbrella. At that time ASGA was sold for at TEV/EBIT multiple of 11. and that would be an attractive opportunity to average down. AZ that accounted for 13. a group specializing in correctional health care. This should be taken with caution however. but has increased their derivatives in the form of warrants to private investors and management. It has no long-term debt.13 in cash per share. With management refocused on organic growth in 2012.80 per share last year. So far in 2012.0.7% of their revenue that pushed down the stock price. Currently CONM has a TEV/EBIT multiple of 9. Financials and History CONM has a rock solid balance sheet. On a historical merger and acquisition basis. This transaction failed to consummate due to the dubious investment history of the potential buyer. Recommendation and Action Taken The hiring of Cantor Fitzgerald signals that management and the board are looking for opportunities. Because of its smaller market cap. In the latest annual report filed on March 2. but also led them to having never lost an account in the history of the company. Valitas Health Services bought American Service Group (ASGA).40. Based on the precedent multiple. because companies with this small market capitalization often signal share buyback to convey that they are shareholder friendly. Insiders own 48% of the company and have wanted to take the company private for sometime. CONM renewed the contract in addition to signing two new contracts in Texas. management has aggressively expanded. This demand from CONM for consistency of quality has cut into their margins.77/day compared to its competitors’ cost of $10. Management Quality and Capital Allocation While margins have been pressured. As mentioned before. There was uncertainty whether CONM would be able to renew their contract with Pima County. there hasn’t been any sign of a stock buyback. most likely a sale. CONM was almost sold to a private equity buyer for $3. From the latest annual report.4 times EBIT. Valuation From a discounted cash flow basis. CONM retained Cantor Fitzgerald to represent them. the company had $16. it would give CONM a price of $4. This took management’s attention away from operations. At the current price of $3. Early in 2012.4. the company should be well capitalized with multiple lines of revenue that will be attractive to a potential buyer.10 in the next quarter. However. CONM average cost of care to municipalities is $9.00.

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