August 3, 2017

On Thursday, the S&P 500 was down 0.2% while Toronto was down 0.5%.

CRH Medical got pummeled down by 29% after releasing Q2 results. I have read the release and listened to the conference call. To me the stock reaction continues to look over-blown. (But I thought that even before this latest plunge).

Changes in the revenue per patient that they receive from insurance companies will certainly reduce their earnings growth in 2018 or perhaps cause a decline in 2018. This is not good considering the stock was pricing in considerable growth earlier this year. But their acquisition and growth model remains intact and so growth in earnings should resume.

Management seems to be confident of the future. The analysts on the call seemed mostly polite but one or two had some challenging questions. It is quite possible that analysts feel somewhat betrayed after recommending the company and then being surprised by the reduction in revenues per case.

I found that management handled the questions well and seemed on top of their numbers.

There was certainly a concern about a significant one-time increase in revenue due to a change in accounts receivable estimates that had benefited Q1 but was not disclosed in Q1. The company explained the reason for that but the reason was weak. I believe it should have been disclosed in Q1.

I do think the company could improve its disclosure. It focuses too much on EBITDA with little mention of bottom line earnings. There did not seem to be any real discussion of the reasons for certain operating expenses increasing quite a bit faster than revenues.

A positive disclosure in the report was that despite the lower revenues per case that will apply in 2018 there has been no impairment in the value of its acquired companies.

Overall, this still looks like a good business to me. But 2018 will be a year of little earnings growth or perhaps a decline. 2017 earnings have also been impacted by certain changes in its payer mix. Recent acquisitions will offset some but perhaps not all of that decline. Earnings should grow substantially in 2019 due to acquisitions.

I will run the numbers to determine what the P/E now appears to be based on adjusted earnings.

I would expect that certain analysts reports will impact the stock price on Friday.