Earnings have been a major player in trading this week, and will continue to be in the coming weeks, but for now I want to share my detailed outlook on Liberator Medical Holdings (LBMH).
The company offers a convenient and reliable way to purchase medical supplies for patients who need them on an ongoing basis. LBMH adds to the convenience by offering direct billing to Medicare and private insurance companies.
Liberator Medical does not manufacture any of these products, but instead is a distributor for over 200 medical supply manufacturers, including all of the preferred suppliers. As the company’s sales volumes have increased, it has become more of a preferred customer, enabling them to buy on more favorable terms and pass savings on to its clients.
LBMH generates customer leads through advertising, including major cable news outlets, as well as through contact with home health organizations and existing clients. Once a customer lead is obtained, he or she must go through a qualification process, which involves obtaining the patient’s medical records, determining insurance qualifications, and explaining the billing process. Approximately 70% of all leads are qualified as full fledge customers.
While the company sells ostomy, diabetes and mastectomy related fashions, urological products are the majority source of revenues. According to the Center of Medicare and Medicaid Services (CMS), Liberator is the leading provider of catheters to Medicare and Medicaid patients, with a solid 27% market share lead over its nearest competitor.
Recurring revenues are an important part of the company’s models, as customers are usually with the company for a four to six year period. In the September 2013 fiscal year, approximately 14% of revenues came from customers acquired in 2009 and prior. The main risk to this model is potential changes to Medicare or Medicaid reimbursements, which account for approximately 79% of revenues. However, given that most of LBMH’s products are of a relatively low cost, any changes in reimbursement should be minor and can be managed.
The company actually received a significant benefit from a Medicare ruling in 2008, when it was decided that replacing catheters after each use was more effective than sterilizing them. Medicare also raised the number of catheters it would reimburse for per month from four to 200, providing more incentive for patients to increase their inventory.
One thing I like to see in new investments is a large interest from management. LBMH’s current CEO is Mark Libratore, who also founded the company in 1990. Mr. Libratore sold it to PolyMedica Corp. in 1996 and left in 1999, only to start up a competitor and rebuy LBMH in 2007. Mr. Libratore owns 37% of the stock, which makes him motivated to act in the best interest of the shareholders. You’ll see an example of this in just a moment after I share some details on LBMH’s financial outlook.
Liberator Medical has enjoyed significant earnings improvement over the past few years, as it was able to grow revenues that improved scale while keeping a lid on costs. Revenues increased from $40.9 million in fiscal 2010 to $69.1 million in fiscal 2013, a compounded gain of 14% per year. LBMH attributed the gains to a solid response to the company’s advertising program. In addition, management believes their strong emphasis on customer service helped drive top-line improvements.
The additional sales volume, along with lower shipping costs in 2013, drove a substantial improvement in the gross profit margin, which rose from 50.3% in fiscal 2010 to 62.8% in 2013. Selling and Administrative expenses have remained relatively flat since fiscal 2011, which along with the higher sales and better gross margins allowed EPS to grow from 5 dents a share in 2010 to 14 cents a share in 2014.
LBMH’s free cash flow exceeded net income in 2013. This reflects the fact that heavy investments in direct expenses advertising made a few years earlier are being amortized, while cash expenditures for these types of programs have actually declined. What encourages me and argues well for future earnings and cash flow growth is the fact that despite the company’s cut back on direct response advertising, it still grew its total customers in 2013.
While management has not made a specific financial forecast for fiscal 2014, they did indicate that they believe they will continue to control advertising costs and expand margins in fiscal 2014. Although they did not directly forecast higher sales, I believe this is implied by the rising margins forecast.
LBMH has used its improved profitability and cash flow to return capital to shareholders. It paid a total of 8 cents a share in dividends in fiscal 2013, and also repurchased approximately $400,000 of its shares in the most recent fiscal year.
Given its strong market position and brand name, Liberator Medical is well positioned for continued growth, and a stock to buy. With an aging U.S. population, demographics are also on the company’s side. The CMS estimates that durable medical equipment (the category LBMH’s products are classified under) will increase from $38.9 billion in 2011 to $66.7 billion in 2022. While Medicare reimbursement is a small risk, the company seems to be in a good spot right now, as scale gains and more controlled advertising have dramatically changed its fortunes.