Advance PCS management team seems to be monitoring their accounts receivable and accounts payable, and the numbers has show improvements of over the past 3 years. The only thing that I have noticed that may be a potential problem is the size of the accounts payable, because I believe that the accounts payable includes the claims from their members that needs to be processed and paid. Many States and local government will impose stiff fines and penalties if these claims are not paid within 45 days, so this can be an expensive source of loans. The company has to constantly balance the benefits of not paying their accounts payable on time versus the liability. I believe the company should put more emphasis on their inventory turnover, because they could realize an additional $37 Million for each day that they reduce their inventory turnover days. The following page includes tables that show the price trend and performance of the company’s stock.
1998 1999 2000 2001 2002
Earning per share N/A N/A 0.42 0.37 1.37
Industry Comparisons
I would recommend a hold for Advance PCS. It is extremely hard to adequately value the companies stock since it has not paid any dividends and it has grown mainly through acquit ions and mergers. Not paying any dividends shows that the company is committed to future growth. AdvancePCS earnings have being growing since the company’s formation and merger, and the company’s cash flow and income from operations has continually improved. With the continual aging of the population, the need for prescription drugs should continue to increase in the foreseeable future, and Advance PCS has years of experience in this market. However, the cost of prescription drugs have become a major political item, There is uncertainty about how current prescription drug bill presently before congress will affect the industry. Lastly, the company’s growth has been mainly through acquisitions and mergers, and the verdict is still out on whether the company will be able to successfully integrate the various systems and business cultures.
Capital Asset Pricing Model (Beta) for Advance PCS
Expected return on Advance PCS = risk-free interest rate +(Beta * expected market risk premium)
R = 5.28% + (.34 x 9%)
R = 8.34%
Weighted Cost of Capital for Advance PCS
Assets Liabilities and Shareholders' Equity
$3,712,744,000 Debt = $2,742,270,000 73.86% Equity = $970,474,000 26.14% Total Value= $3,712,744,000 100.00%
After-tax cost of debt = pretax cost x (1 - tax rate)
= 6.93% x (1-.35)
= 4.50%
WACC = (.7386 x 4.5%) + (.2614 x 8.34%)
WACC= 5.51%
The Capital Asset pricing model assumes that well-diversified investors who are concerned only with market risk dominate the stock market, and the model would work only if a company has no debt. However, most companies are financed with a combination of debt and company stocks. The Weighted Cost of Capital takes into account the company debts and the affects of taxes in the calculations. The cost of capital will differ among all three companies mainly due the percentage of debt to equity of all the three companies. If Advance PCS were to issue more debt, then their cost of capital will improve. However, this action may place the company in jeopardy of going bankrupt.
Current Capital Structure: Debt. = $2,742,270,000
EBIT = $324,453,000
Interest = $43,658,000
Net income = $280,795,000
ROE = 28.93%
EPS = $2.94
Shares = 95,500,000
Price per share = $22.21
Equity = $970,474,000
Proposed Capital Structure: No Debt.
EBIT = $324,453,000
Interest = $0
Net income = $324,453,000
ROE = 8.74%
EPS = $1.48
Shares = 218,970,059
Price per share = $22.21
Equity = $3,712,744,000
Break-even EBIT
EBIT/218,970,059 = (EBIT - $43,658,000)/95,500,000
EBIT*95,500,000 = (EBIT - $43,658,000)*218,970,059
EBIT = (EBIT - $43,658,000)*(218,970,059 / 95,500,000)
EBIT = $77,426,016.58
Advance PCS is using leverage to improve the shareholder’s return on their equity. If the company’s EBIT were to fall below $77.4 million, then the company’s leverage would not be beneficial.
American Healthways Inc (AMHC)
American Healthways, Inc. provides care enhancement and disease management services to health plans and hospital through American Healtheways Services, Inc. (AHSI), a wholly owned subsidiary. The company supports hospitals and health plans with common human resources, clinical, marketing and information technology (IT) resources. The company’s integrated care enhancement programs serve entire health plan populations through member and physician care support interventions, advanced neural network predictive modeling and confidential, secure Internet-based application that provides patients and physicians with individualized health information and data.
AMHC provides comprehensive care services with emphasis on diabetes, cardiac disease, and respiratory disease. Care enhancement combines highly skilled , empathetic people with cutting edge technology to support and supplement the patient-physician relationship. For physician, AMHC is the extension of their office staff and for health plan, AMHC they are a sound decision and highly effective customer retention program. For the nine months ended 5/31/03, revenues rose 41 % to $119.5 million. Net income rose from $6.5 million. To $13.4 million. Revenues reflect significantly higher average health plan equivalent lives under management. Net income also reflects improved gross margins and an increased absorption of overhead. To give you an idea of how is the AMHC financial leverage the following ratios will show you the firms performances.
AMERICAN HEALTHWAYS, INC. NASDAQ-NM
02 01 00 99 98
Leverage ratios
Long-term debt ratio .005 0 0 0 0
Total debt ratio .247 .217 .275 .245 .226
Times interest earned 48.4 50.2 29.4 0 0
Liquidity ratios
Net working capital to
Assets .205 .188 .141 .341 .237
Current ratio 1.97 2.13 1.70 2.94 2.89
Quick ratio 1.82 1.99 1.5 2.66 2.76
Cash ratio .95 1.07 .84 1.86 2.1
Interval measures (days) 159.8 121.3 89 158.3 170
Efficiency ratios
Asset turnover 1.3 1.3 1.2 1.2 1.1
Fixed asset turnover 6.9 5.6 1.3 8.3 8.0
Average Collection period 48.5 39.9 42.2 47.4 46.5
Profitable ratios
Net profit margin 8.4 4.2 .2 6.6 6.0
Return on assets 7.7 5.9 .4 8.0 7.5
Return on equity 14.4 7.5 .4 10.7 8.5
Leverage Ratios
Leverage ratio shows how heavily the company is in debt. The five-year trend shows that American Healthways are in good condition. It has a very low ratio in long-term and its total debt ratio is pretty much stable, which demonstrates that the company is not in a struggle to pay what they owe.
Liquidity Ratio
Liquidity ratio measures how easily the company can lay their hands on cash to pay immediate liabilities. The five-year trend demonstrates that American Healthways liquidity ratios are stable. Averaging in about two percent to two point three percent on their current ration and cash ratio and it also has more opportunities to pay their bills with interval measure ratio.
Efficiency Ratio
Efficiency ratio measures how productively the company is using its assets. The five-year trend also demonstrates that American Healthways efficiency ratios are stable. Averaging one point two on their asset turn over, six percent on their fixed asset turn over, and forty-four point nine percent average collection period which tells you that they have an efficient and stable collection department.
Profitable Ratio
Profitable ratios are used to measure the companies’ return on its investment. The five-year trend again shows that American Healthways profitable ratios are going in the right direction. Although it went down on the 2000, it was able to do come back the following year and continue to increase its ratios by forty percent. With all the ratios shown in the table, it illustrate that the company has the reason to be in the top 5 fastest growing business in the list of 100.
The Price/Earning Ratio is an indicator of the relative expensiveness of a firm’s common stock. For AMHC, P/E ratio for year 2000 and 2001 were high because during that year the investors anticipate relative favorable future development and price of the stock went up from 8.17 to 37.32. For many companies, especially the newer technology and higher growth companies, you may see very high P/Es. In such cases, the shares maybe selling at very high prices even tough they are making very little money. That happens when investors focus on the promise of significant future earning growth. If a company doesn’t have five years the table will give a Not meaningful (NM) value for the high and low P/E value.
The price performance tables shows how AMHC stock’s percentage movement over each of five measurement period: 4 weeks, 13 weeks, 26 weeks, 52 weeks and year to date (YTD). AMHC’s price compared to S&P 500 is on a favorable range, which is at 88.9 percent on YTD. The Rank in the Industry column shows how the stock performed relative to the industry, which the company operates. This means that the stock performed better than those of 83 percent of the company in its industry. The fifth column, which contains an Industry Rank, It shows a percentile of 49. This tells us that the industry performed better than did 49% of the industries universe.
The EPS history report shows you quarterly earnings per share for AMHC for the last four years. Earning per share is calculated by dividing the amount of the company’s profit available to common stock holders by the number of outstanding shares of common stock. By looking down at the columns, you can track any seasonality in the business. For AMHC, year 2000, their EPS was zero percent because of the introduction of the some new program which tied up their money on general administrative & R&D cost due to introduction of new programs and acquiring new contract which made them hire more staff. These expenses gave them low revenue for that year but it was gained the following year when it gets reflected at the income statement. By looking across the rows, you get a sense of how the company has grown from year to year. AMHC has achieved a steady growth and earnings per share over the period covered.
The valuation ratios report helps investors decide whether a stock is inexpensive or costly relative to alternative investment opportunities Ratios to its Industry, Sector, and the S&P 500. The P/E ratio shows that AMHC has 36.95 % expected earning than all 3 categories combine. Beta shows that it has .57 volatility to the overall stock market which means it indicate stability of the stock. The Price to sales is 4.03, which indicates that compared to overall market it show that it suggest optimistic future earnings expectation on the part of the investors. Price to book is a theoretical comparison of the value of the company’s stock to the value of assets it owns free and clear of debt. Price to tangible book is similar to price to book, except that we have to subtract the value such as goodwill from book value. Price to cash flow ratio is the current price divided by cash flow per share for the trailing twelve month. When measuring a company’s operating performance, cash flow is an alternative to net income, which is calculated by subtracting all expenses to revenue. Price to free cash flow looks at the cash the company’s operation actually generated in a given year, and subtracts important non-operations cash outlays; capital spending and dividend payments. Accordingly, free cash flow is the purest measure of a company’s capacity to generate cash.
SYNOVIS LIFE (NasdaqNM:SYNO)
The financials start in 1998 and we can see that they are not doing as well. Although once we start looking at the 2002+ we can see a great improvement. SYNOVIS LIFE in the past year became the fastest growing companies in USA.* (FORTUNE.COM) The stock price at the 52 week high was 170% higher then last years. The stock price is still stable and company has been rated as a buy by several brokerage firms. Fortune.com has rated it as number twenty two on its one hundred fastest growing companies in USA. Looking at ratios we can see that Profitability has gone up so did the return on assets and equity. the company is virtually debt free now with Long Term debt of just 0.01 which is much higher when we compare it to the industry average and even S&P 500. Healthcare Industry overall is growing and will expand rapidly over coming years. There are large numbers of baby boomers who are going to retire and medical needs will increase greatly over time. SYNOVIS LIFE is a large provider of medical supplies to the industry and demand is projected to increase over the coming years.
As we look at the liquidity ratios we can see that company is doing well. The ratios provided by MSN investments show that over the past 5 years SYNOVIS LIFE is not the best performer. But we must understand that the company is rather new and industry average will be skewed at the beginning of the firm’s life. For the year ending 2002 and in 2003 we can see that the firm had above average growth of review and decreased debt. Net Working Capital is also higher then industry average about double that so this is a promising trend. Its efficiency ratios are equally impressive which beat the industry and the S&P 500 average. Since Synovis Life is more of a distribution firm asset turnover is a important gauge of how well the firm is doing. This is also called management efficiency which is excellent. Over the past two years company streamlined and increased the inventory and asset turnover. Their profit margins however are slightly lower then industry average. This can be explained by Synovis Life being new firm and wanting to enter the market. Best way to penetrate the shied is to have competitive pricing and great quality, and by lowering the profit margins the firm has been able to secure contracts with Healthcare providers. Institutional investors of mutual funds have also approved this strategy and in the current year 26% of the outstanding stock is held by these investors.
I believe that company will continue to grow and have great return on its investment. The healthcare industry growth is much like the growth of I.T. in the 1990's. I don’t think however that the bubble will burst anytime soon. There are millions of baby boomers that are going to retire and it will continue to grow exponentially for the coming years. The business cycle of the health industry is more stable with prolonged grown spurs and managed decline.
How much does the company sell and earn?
Investors need to know how much stuff or services a company sells, and how much of that total it keeps as income (or profit) to grow its business or return to shareholders. The more of each, the better. In general, look for companies that sell and earn more than peers.
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SYNOVIS LIFE TECHLGS one-year sales: 54.80 Mil.
Difference from the average for the Medical Appliances & Equipment group: -77.53%
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SYNOVIS LIFE TECHLGS one-year income: 4.40 Mil.
Difference from the average for the Medical Appliances & Equipment group: -83.32%
How fast is the company growing?
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SYNOVIS LIFE TECHLGS one-year sales growth: 52.70%.
Difference from the average for the Medical Appliances & Equipment group: 35.40 pct. pts.
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SYNOVIS LIFE TECHLGS one-year income growth: 62.00%.
Difference from the average for the Medical Appliances & Equipment group: 14.20 pct. pts.
How profitable is the company?
Investors prefer companies that increase profit margins -- the percentage of sales that they keep -- every year. This is accomplished either by lowering expenses or raising prices. Look for companies that consistently find ways to squeeze more profits out of sales than their peers.
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SYNOVIS LIFE TECHLGS one-year net profit margin: 8.0%
Difference from the company's 5-year average net profit margin: 4.4 pct. pts.
Difference from the average for the Medical Appliances & Equipment group: -2.8 pct. pts.
How is the company's financial health?
The debt/equity ratio shows how much a firm has borrowed long-term as a percentage of its stock equity. The lower, the better.
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SYNOVIS LIFE TECHLGS debt/equity ratio: NA.
Average debt/equity ratio for the Medical Appliances & Equipment group: 0.25.
How has the stock performed?
Investors need to know how a stock has performed relative to all other stocks. Generally they attempt to hold the market's top-performing securities -- those that have done better over the past year than the majority of stocks in their industrial group and all stocks in our database. Look for a positive trend in the 12-month, 6-month and 3-month periods.
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SYNOVIS LIFE TECHLGS price change in past 3 months: 44.4%.
Difference from the average for the Medical Appliances & Equipment group: 36.10 pct. pts.
Percentage of all stocks that SYNOVIS LIFE TECHLGS outperformed: 88%
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SYNOVIS LIFE TECHLGS price change in past 6 months: 159.5%.
Difference from the average for the Medical Appliances & Equipment group: 143.30 pct. pts.
Percentage of all stocks that SYNOVIS LIFE TECHLGS outperformed: 93%
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SYNOVIS LIFE TECHLGS price change in past 12 months: 298.6%.
Difference from the average for the Medical Appliances & Equipment group: 266.40 pct. pts.
Percentage of all stocks that SYNOVIS LIFE TECHLGS outperformed: 96%
Where is the stock's support and resistance?
Investors should note the average prices at which a stock traded over the past 50- and 200-day periods. These "moving averages" tend to provide a floor, or support, for stocks trading above them and a ceiling, or resistance, for stocks trading below them. Stocks that sink below support are in danger of further weakening; stocks that rise above resistance have a shot at new highs.
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SYNOVIS LIFE TECHLGS current price: $27.83
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Overhead resistance for SYNOVIS LIFE TECHLGS: $32.50 (52-week high)
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First support for SYNOVIS LIFE TECHLGS: $26.55 (50-day moving average)
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Second support for SYNOVIS LIFE TECHLGS: $16.54 (200-day moving average)
What's the best guess for the stock price in 1-2 years?
Investors fix targets for most stocks by estimating future earnings per share and then applying a price-to-earnings "multiple", also known as the P/E ratio. Companies with the most consistent earnings history or strongest growth prospects receive the highest P/E multiples. We calculate price targets for the current and next fiscal year by applying the stock's current multiple to the average professional analyst's estimate.
Valuation using SYNOVIS LIFE TECHLGS 's current multiple (P/E):
What's the best guess for the stock if it were valued like its peers?
Investors often come to believe that a stock is undervalued or overvalued compared to other stocks in its industrial group. To calculate an alternate target price for the current and next fiscal year based on those beliefs, investors can apply the average PE multiple for a company's industrial group to the average professional analyst's earnings estimate for the company in those periods.
Valuation using the industry's current multiple (P/E):
Investors estimate the level of unanimity about a stock's prospects among analysts by calculating the range between the most optimistic and most pessimistic estimates.
- Average number of analysts covering SYNOVIS LIFE TECHLGS : 3
- SYNOVIS LIFE TECHLGS analysts' high/low spread: 17%
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SYNOVIS LIFE TECHLGS analysts' confidence: Medium
Hold is the recommendation for Synovis life. This is due to the recent acquisitions and expansions. We predict that the stock price will increase over the next 12 months the target price should be around $45. This is because the EPS and Sales have been increasing at a rapid rate. Consolidated net revenue rose 43 percent to $15.3 million in the third quarter of fiscal 2003 from $10.7 million in the year-earlier period. Operating income reached $2.2 million, a 67 percent increase over the year-ago quarter. The company reported net income of $1.5 million, or 14 cents per diluted share, versus $895,000, or nine cents per diluted share, in the third quarter of fiscal 2002.
For the first nine months of fiscal 2003, consolidated net revenue rose 53 percent to $43.0 million from $28.2 million in the first nine months of the prior year. Operating income rose to $5.3 million versus $3.2 million in the same period last year. Consolidated net income increased to $3.5 million, or 34 cents per diluted share, in the first nine months from $2.2 million, or 22 cents per diluted share, in the year-ago period.
Cash provided by operating activities totaled $1.5 million in the first nine months of fiscal 2003, of which $964,000 was generated during the third fiscal quarter. Working capital demands in the first nine months of the fiscal year used $3.6 million, and the company invested $3.6 million in capital expenditures to support current and future growth. "Attaining 24 consecutive quarters of year-over-year revenue growth at a 36 percent average growth rate is a wonderful accomplishment for the company," said Karen Gilles Larson, Synovis Life Technologies president and chief executive officer. "The exceptional performances delivered by both the surgical and interventional businesses have made this possible. The strength of these businesses and the strategies each has in place underlie our enthusiasm as we look ahead.
Based on the strong performance of each business segment, Synovis Life Technologies, in July, increased its revenue and earnings guidance for the fiscal year ending October 31, 2003. At current business levels, the company expects revenue of $58 million to $59 million, with earnings of $0.43 to $0.46 per diluted share in fiscal 2003. Previous fiscal 2003 guidance called for $50 million to $55 million in revenue and earnings of $0.38 to $0.41 per diluted share. The revised estimates represent a 45 to 47.5 percent annual consolidated revenue growth and a 39 to 49 percent gain in earnings per share over the previous year.
Reference:
University of Phoenix (Ed.). (2001). Fundamentals of Corporate Finance [University of
Phoenix Custom Edition e-text]. New York: McGraw-Hill Custom Publishing.
Financials (2003). Yahoo Finance. Retrieved September 25, 2003 from the World Wide
Web: http:// finance.yahoo.com
Key Ratios (2003). MSN Money. Retrieved September 25, 2003 from the World Wide
Web: http:// moneycentral.msn.com
