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Prism Medical (PM.V/PSDLF) a Mispriced Situation with Growth and Income

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Mar. 31 2015, 3:52 PM ET - by VF member bz1516 (2473 gold star (click for information on feedback))

Prism Medical (PM.V/PSDLF) a mispriced situation with growth and income

Current Price: $10.07CAD
Market Cap: $49mm
Shares o/s: 4,826,000
Revenues: $48mm

Prism Medical produces and markets durable medical equipment products & services to the mobility disadvantaged in Canada and the US. Its primary products, fixed & portable ceiling lifts and mobile floor lifts are sold to the hospital, nursing home and home healthcare markets.

The company was restructured in the last fiscal year ending Nov 30. They sold their UK subsidiary netting $51mm with an after tax profit of $24mm. To put this in perspective, the market cap of the company is now $48mm.

The major use of the funds was for a share buy-back. Shares decreased from 8,400,000 to 4,800,000. The rest of the funds were used to clean up the balance sheet and put the company in position to grow its US market segment. The plan is to grow the US market both organically and by acquisition in its primary product lines as well as its secondary products including stair lifts, increasing its vertical integration as opportunities arise.

Sales for the year ending Nov 30 were $44mm of which 68% were in the US. Gross margins increased to 46% in Q4 vs 38% in the prior year. The company has researched and determined that whatever changes take place in US healthcare policy their products will continue to enjoy a positive market environment. Since 2011 Canadian sales have essentially been flat while US sales have grown considerably since 2012, from $17mm to $29mm.

The opportunity here is the market does not appear to appreciate the change in direction the company has made this past year, both from a marketing standpoint as well as financially. The recently released Q4 and annual financial results as shown in the press release look like a lot of red ink across the board from operating income to net income to eps, both for the quarter and for the year. Looking a little deeper indicates the company’s results are not only a lot better, but show it has already turned the corner. None of this would be apparent from reading the press release. The full picture emerges only from reading the full financial statement and MD&A and retracing the sale of the UK subsidiary and the stock buyback.

When the one-time restructuring charges are taken out of the 2014 income statement and the large jump in income taxes normalized, the company appears to be quite profitable with an upward trajectory and in fact has a PE ratio of ~10x, LQA. The stock pays a dividend and has a 5.0% yield, however the POR is only 40% based on expected 2015 full year adjusted eps. Management gave their most positive outlook this quarter, restating their optimism that their plan for the company is proceeding, with opportunities for further organic and external growth.

The shares are currently mispriced in my opinion. The mispricing is amplified by the fact management appears to communicate with its holders and the financial community only through its SEDAR filings and press releases. In such a situation there is going to be a lack of professional investors following the stock, both on the buy and sell sides. While not the most desirable situation, it does explain the lack of understanding of the current quarter’s results by mostly retail investors. The written disclosure provides enough performance and background for my comfort level. For me this is an opportunity.

Management expects margins to continue to improve. The recent financial statements support that position. In addition to higher margins the recent moderate size acquisition in January is expected to be accretive to earnings for this year which ends in November. With improving margins and the accretive acquisition I expect eps to be $1.25 or 8x eps for fiscal 2015 ending in November. As the earnings already recorded in Q4 become more visible to everyone I expect the shares to advance at least 50% over coming quarters. As growth progresses over the next couple years my goal is for the shares to advance significantly further. Based on management’s track record as a capital optimizer I expect additional growth opportunities to develop along the way.

Q4 results:

Q4 financial statement:

Q4 MD&A:

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Prism Medical (PM.V/PSDLF) a Mispriced Situation with Growth and Income