VMD - Viemed Healthcare: Another Cyclical Bull-Run May Be Just Getting Started

2023-11-21 09:46:52 ET

Summary

• Viemed missed earnings and sales estimates in Q3, but there are encouraging signs for a potential bull run.
• The stock has been trending upwards with increasing reimbursement rates and patient numbers.
• Viemed's recent acquisition, HMP, immediately resulted in accretive earnings growth.

We wrote about Viemed Healthcare, Inc. (VMD) in February of this year when we stamped a 'Buy' rating on the stock. Technically, the stock was undergoing a strong trending move to the upside with the ModoHealth purchase and increasing reimbursement rates and patient numbers all adding to Viemed's investment case at the time. Furthermore, the ruling in favor of Viemed concerning OIG claims in January was also taken well by investors with shares rallying higher post the ruling.

Given the cyclical nature of Viemed stock, we forecasted that shares would continue rallying up to overhead resistance ($11 + per share), which eventually played itself out. As we see below, shares topped out above $11.70 in April of this year and have been in a sustained downtrend of lower highs & lower lows since then. Given recent bullish action however (which seems to be leading to an imminent crossover of Viemed's intermediate MACD), we believe another cyclical bullish move may be on hand for Viemed once more. Remember, the MACD technical indicator warrants attention on long-term charts due to how it analyses VMD's underlying trend & momentum from the sizable amount of information that goes into the signal

Therefore, although Viemed missed on both its earnings & sales estimates in its recent Q3 numbers, we saw plenty of encouraging signs in its earnings report that a fresh cyclical bull run may be ahead for VMD. The play here would be to initiate a small position on the initial MACD crossover followed by more capital on the long side when indeed a golden cross (crossing over of the stock's 10-week moving average above its 40-week counterpart) eventually comes to pass. Here are some reasons why we are confident this technical trend will play out in due course.

Underserved Markets

When dealing with stocks that are trading well below their all-time highs, it is vital to understand the fundamentals to ascertain the potential for sustained earnings growth (which will ultimately move the share price in the long run). Although earnings revisions have cooled off in recent months, Viemed is still destined to grow as the company continues to increase its employee base (through acquisitions) at an accelerated rate. The key though here with Viemed's ongoing acquisitions (HMP being the latest in the sleep segment) which investors should understand is that these purchases only enhance Viemed's potential in its core business segments. In effect, the issue here (whether in COPD, oxygen services, or in the sleep segment) is that only a small percentage of related patients in the US are being treated at the moment. Therefore, the issue in earnest is not a lack of patient numbers (quite the contrary) but rather has more to do with getting in front of & increasing the awareness of decision-makers (Hospital cash managers, physicians, etc) who can move the needle for Viemed's services over time. Therefore the underserving of present patients means Viemed's products & services should remain in high demand as more markets get penetrated over time.

Above-Average Profitability

Viemed continues to generate strong operating cash flow ($39.6 million over the past four quarters), lending itself to sustained growth in the company's book value. Gross margin in Q3 almost reached 62% which was the highest number for this key profitability metric in 24 months. Although CapEx needs remain quite high ($23.7 million over the past four quarters), the generation of positive cash flow means that Viemed can continue to grow inorganically through ongoing acquisitions. There is no better example of this than the HMP mentioned above acquisition where Viemed's organic 'Sleep' business reported standalone 11% growth in Q2. At the same time, the HMP addition also aided the bottom-line number in this segment.

The company's trailing return on capital number tops 7.5% and we do not see this key metric declining any time soon. Viemed's updated proprietary platform (Engage Care Manager) continues to set the company apart from its peers (in terms of patient care) & the regulation front remains steady with competitive bidding continuing to be kept at bay. Furthermore, even though EPS revisions have been dialed down in recent months, Viemed is still expected to grow its bottom line by strong double-digit percentages over the next few years as we see below. What is driving these numbers is Viemed's strong revenue growth profile where 31%+ expected top-line growth this year is expected to be followed by 21%+ sales growth in fiscal 2024.

Valuation

Although Viemed's trailing non-GAAP earnings multiple (32.75) comes in slightly ahead of the company's 5-year average (30.16), the price of Viemed's assets, sales & cash-flow is cheaper on a relative basis as we see below. Remember assets and sales are essentially what causes earnings and cash flow to materialize so buying these on sale makes sense from a forward-looking basis. Moreover, Viemed's below-average cash-flow multiple demonstrates the investment firepower available whose job is to create more cash in the future. Remember, cash is the heartbeat of any company as the value of Viemed as an investment stems from those very same cash flows.

Risks

Risk is controlled in this setup in two ways. Firstly, a minor long position should only be entered into when we have a convincing intermediate MACD swing low (preferably followed by a subsequent higher high on the weekly chart). Then, only when a firm upward trend has been established (where an intermediate golden cross has also been established), is the lion's share of one's allocated capital added to the position. The reason for this layout is due to the micro-cap nature of Viemed in that due to its under-average trading volume, one must be sure (of trend direction) before committing meaningful capital to the position.

Conclusion

Therefore, to sum up, considering the encouraging fundamentals of Viemed's underserved markets, technical analysis & the company's improving profitability, we believe shares may have already bottomed here. Given the micro-cap nature of this play however (which means risk is elevated due to under-average trading volume), investors should be mindful of position sizing initially especially before a sustained upward trend begins to gain traction (which we have now). We look forward to continued coverage.

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