CEO Sells Huge Amount of Shares of This Technology Solution Stock
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If a founder and CEO sold nearly $11.5 million worth of shares during November when his company was trading near its 52 week high, is it worth noticing?
That company is MedAssets (NASDAQ: MDAS), a health care technology solution company that has seen its shares advance 72.3% year-to-date to $16.51. Since November, its founder, chairman, and CEO John Bardis has kept selling the company’s shares at an average price of $15.64 to $17.16 per share. Effectively, he now owns nearly 1.19 million shares in the company. Should investors follow his lead? Let’s find out.
MedAssets is the provider of technology solutions to help hospitals and health systems improve their overall effectiveness, including operating margins and cash flow. It is confident to deliver a 1.5%-5% increase in operating margin by pushing up revenue capture, reducing the costs of supplies, and improving the efficiency of resource utilization.
The business is divided into two main segments: Revenue Cycle Management and Spend, and Clinical Resource Management. The company has more than 4,200 acute care hospitals and around 100,000 non-acute provider locations in the US and Canada. In 2011, the latter segment contributed nearly $364 million to the revenue base, accounting for nearly 63% of the total revenue.
MedAssets has a history of consistent growth in its revenue and cash flows, but has had fluctuating EPS. In 2005, it had $99 million in revenue, with EPS of $0.63, and generated $21 million in free cash flow. Fast-forward 6 years; in 2011, the revenue grew more than 5 times to $578 million, with $75 million in free cash flow. However, the 2011 and 2010 EPS were negative (-$0.27 in 2011 and -$0.57 in 2010). In 2010, the negative EPS was due to $46.4 million in charges of impairment of goodwill and intangibles, and negative EPS in 2011 was due to higher amortization intangibles charges and higher interest expense.
From those figures, without looking at the balance sheet, we might draw the conclusion that MedAssets employed substantial debt to support its acquisitions, leading to high goodwill and intangible levels. Indeed, as of September 2012, the total stockholders’ equity was $438 million, half of its $893 million long-term debt. The cash position was only $8 million, and the level of goodwill was breathtakingly high at more than $1 billion. That leads to the negative tangible book value of -$16 per share.
Even free cash flow (calculated by deducting the reported capital expenditure from operating cash flow) has been positive, but the acquisition cash flow hasn’t been included in the formula. MedAssets has spent $210 million in 2008 and nearly $750 million in 2010 on acquisitions. Including those in the free cash flow calculation, free cash flow would have been negative.
MedAssets' peers, including McKesson Corporation (NYSE: MCK) and Accretive Health (NYSE: AH), employ much lower debt, with only 0.4x D/E for McKesson and no debt for Accretive Health, whereas MedAssets’ D/E is 2.1x. Among the three, only MedAssets has negative tangible book value, whereas tangible book of McKesson is $0.20 per share and Accretive Health’s is $2.60 per share. Year-to-date, investors have been much better off if they stuck to MedAssets.
Accretive Health has been the worst performer, with a breathtaking 50.4% loss for its existing shareholders. It seems that the year-to-date performances of those stocks don’t tie to their operating performances. Trailing twelve months, Accretive Health delivered a 9.44% return on invested capital, whereas MedAssets returned only 0.87%. The return of McKesson is the greatest, at 14.3%. Currently, McKesson seems to be the cheapest, with 10.9x forward earnings, then MedAssets with 13.2x forward P/E, and Accretive Health with the priciest valuation at 25.6x.
Foolish Bottom Line
Among the three, I would prefer McKesson because of its highest return on invested capital, ample amount of leverage, and lowest valuation. MedAssets isn't my choice for now, as it produced nimble returns and had a high leverage level, negative tangible book value, and substantial long-term debt.
hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend McKesson. 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!