Should We Follow The Recent CEO Purchase of ExamWorks?
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, James Price, the CEO of ExamWorks (NYSE: EXAM) bought 14,500 shares of the company on the first day of March at an average price of nearly $14 per share, with a total transaction value of more than $200,000. For more than a year, ExamWorks has experienced a significant rise in its share price, from $6.50 to $15.25. Should investors follow James Price into ExamWorks at its current price?
ExamWorks is considered a leading independent medical examination (IME) provider with four main geographical business segments: United States, Canada, United Kingdom, and Australia. The majority of its 2012 revenue, $340.2 million, or 65.3% of the total revenue, was generated in the U.S while the UK ranked second with $131.3 million in revenue. Its primary service is to help clients know the nature and permanency of medical conditions or personal injury, their causes, and the suitable treatment needed. ExamWorks reported that there were five types of clients that frequently need IME services including insurance companies, law firms, third-party claim administrators, government agencies, and state funds. No single customer has accounted for more than 10% of its total revenue for the past three years.
Generating losses and weak balance sheet
Over the past three years, ExamWorks has increased its top line significantly, from $164 million in 2010 to $521 million in 2012. However, the company has consistently generated losses during the same period. Since 2010, ExamWorks’ net losses have fluctuated in the range of -$6 million to -$15 million. The losses were due to high interest expenses and other expenses that the company had to pay in the past three years. Indeed, ExamWorks employed significant debt in its operations. As of December 2012, it had $244 million in total stockholders’ equity, $9 million in cash, and $379 million in long-term debt. What worries me more is that the company used debt and equity to finance two biggest items on the balance sheet: the goodwill of $370 million and intangible assets of $153 million. Thus, the company’s tangible book value was negative, at nearly -$300 million.
But has the most expensive valuation
At a current trading price of $15.25 per share, ExamWorks is worth $523.7 million on the market. In 2012, it generated around $63.68 million in EBITDA. Thus, the market is valuing the company at 13.63 times EV/EBITDA, a quite expensive valuation. Compared to its peers including CorVel Corporation (NASDAQ: CRVL) and Coventry Health Care (NYSE: CVH), ExamWorks seems to be the most expensive company among the three. CorVel is trading at $48.48 per share, with a total market cap of $524.7 million. The company is valued at nearly 9 times EV/EBITDA on the market. Coventry Health Care, at the current trading price of $45.70 per share, has a $6.1 billion market cap. It has a cheapest EV multiple valuation of 6.72 times EV/EBITDA. Among the three, ExamWorks is the least profitable company. In 2012, it generated only 1% operating margin while the operating margins of CorVel and Coventry were significantly higher, at 10% and 5%, respectively. ExamWorks also employs a much higher debt level than CorVel and Coventry. While CorVel doesn’t have any debt and Coventry had its debt/equity ratio at only 0.3x, the debt/equity ratio of ExamWorks is as high as 1.6x.
Foolish Bottom Line
I personally do not think ExamWorks offers investor compelling investment opportunity. In contrast, it is quite risky. With a negative tangible book value, huge goodwill and intangible assets and a high EV multiple valuation, this company doesn’t have any downside protection for value investors.
Anh Hoang 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!