A Small Cap Company Making Waves in the Business Services Industry

Naomi is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Business Services industry is more about companies providing business-related services to other companies or organizations. It is an industry that is highly fragmented with companies offering a variety of services that includes debt collection, legal services, marketing and advertising, logistics and shipping, consulting, human resources, security, leasing, and facility management.

This is the industry Performant Financial (NASDAQ: PFMT) operates in. The company was founded in 1976. Its headquarter is in Livermore, California. Performant is a leading provider of technology-based recovery and related analytics in the U.S. It offers reliable workflow management solutions that benefit government, healthcare and financial services sectors. To sum it up, the services it provides are:

  • Financial Asset Recovery
  • Audit & Recovery
  • Risk Management
  • Cost Containment
  • Fraud, Waste & Abuse

The business drivers

One of the things that have kept the company going is that the management understands how competitive its markets are. Based on this, the company makes sure it stays ahead of the competition by improving its recovery rate with every awarded contract. This is considering that in the debt recovery industry, maintaining a high level of recovery rate is among the several ways a debt recovery company can grow a commendable list of long-term clients.

Another factor that has been driving the company's business is the management's ability to understand where the higher percentage of its revenue is coming from. From available data, Department of Education, Centers for Medicare & Medicaid Services and three Government Agencies make up the limited number of clients that generate a greater part of the company's revenues.

Growth strategies and opportunities

When it comes to investment, I believe the taste is usually in the growth capabilities of the company in question. Performant is operating in an industry with huge growth opportunities. 

The above bar chart shows the increasing revenue growth in the student lending segment. From year 2009 to 2010, there was significant increase in revenue growth. From 2011 onward, the growth somehow reduced by a significant amount. The 2013 year-over-year result will determine if the growth will stabilize or it will continue on its upward trend. However, the student lending segment is a growth opportunity not to be overlooked by the company, even though it means forming strategic relationships with other companies in order to further grab more market share in this segment.

This bar chart shows the company's healthcare segment revenue growth. The results show that this segment makes up only 26% of the company's revenue in 2012. Even at that, it has huge growth potentials. Within the three years in focus, the increase has been extremely significant. In 2010, the company recorded $1.82 million and by 2011, it increased by more than $19 million. The increase was even higher in 2012 as the figures climbed up to $33 million.

With the company's strategic relationship with Magellan Health Services (NASDAQ: MGLN) starting in the first quarter of fiscal 2013 and the projected federal government expenditure in the healthcare sector this year, I should be expecting a further increase in revenue in 2013 as compared to 2012.

This is especially considering that according to available reports and excerpts from the press release, the federal government spent approximately $80.0 billion on specialty pharmaceuticals in 2011 alone. The projected global revenues in this industry, according to healthcare consulting firms, will be above $160.0 billion this 2013.

Magellan offers specialty healthcare management services in the U.S. with its focus mainly on behavioral health, pharmacy and radiology programs. Its services are open to health plans and government agencies. It is also open to pharmaceutical manufacturers and state Medicaid programs, serving approximately 24 states and the District of Columbia.

The company recently released its second quarter earnings report. For the quarter ended June 30, net revenue stood at $842.7 million. The segment profit stood at $75.0 million, while net income and diluted common share are reported as $31.5 million and $1.15, respectively. The EPS of $1.15 beats analysts’ estimate by $0.14.

Although a good number of companies grow by acquisition, I believe Performant should concentrate more on making the most of the growth opportunities already at its doorstep and avoid acquisitions that might adversely affect the uptrend of the company's revenue.

I want to make reference to Allscripts Healthcare Solutions (NASDAQ: MDRX) and how its acquisition of Eclipsys adversely affected the company's cash flow and halted its growth. The negative effect of that acquisition was such that the company lost most of its business to competitors, and, in the end, it cost the then CEO of the company his job.

Allscripts is actively involved in the development of clinical, connectivity, financial and information solutions for the health sector in the United States. On July 10, the company’s management made it clear that the company expects its second quarter bookings to grow above $200 million in comparison to $194 million reported in the same quarter of the previous fiscal year. According to the present CEO, Paul Black, “We are seeing a healthy mix of new agreements with existing clients as well as new client wins, growing our recurring revenue backlog as well as bookings.”

Conclusion

With the spending in healthcare projected to increase annually by 6%, there will also be increase in improper payments. In 2011, Medicare spent $554 billion out of which an estimated $43 billion was improper payment. The more the healthcare sector records improper payment, the more they engage in outsourcing of recovery services and that puts Performant in line of generating more revenue. This is especially true with the healthcare sector spending projected to grow 5% annually through 2021.

Even with the reported increase in insider selling of the company's stocks a few months ago, based on the company's several years of operating experience, I firmly believe Performant has strongly positioned itself in the Business Service industry for further growth.

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Naomi Warmate-Igwe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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