CRH Medical updated August 7, 2017

CRH Medical is updated and rated Speculative (lower) Strong Buy at U.S. $2.70 or CAN $3.42. $2.70 was the price earlier today in U.S. trading but it closed at $2.60, up 5.1%.

This stock has certainly been very disappointing recently. Therefore it seems fair that I review my history with this stock.

It was added to the site on October 9, 2016 rated Speculative Buy at U.S. $4.32. For the start of 2017 it was rated Speculative Buy at U.S. $5.25

On April 7, 2017 it was updated and rated Speculative Buy at U.S. $8.55.

Subsequently its Q1 earnings report in late April revealed a decrease in revenue per case at its largest subsidiary due to a “change in payer mix” (which really probably would have been more properly described as the loss of a major insurance payer customer). On April 30, 2017 I commented on the company and the price decline and indicated I might buy more.

The price continued to decline in June and I remained positive on the company in my comments.

On July 10 I noted that it was the subject of short selling and some analyst criticism.

In mid July the stock fell precipitously on the announcement that insurance companies would reduce the fees they pay per case by some 18%. I commented on July 16 and July 17. indicating I was adding to my position.

Around August 3 the company released Q2 earnings which were judged to be disappointing and the stock was pummeled down by about an additional 30%. See my comments of August 3 just below.

It’s fair to ask what went wrong here.

The risk that insurance companies could reduce the fees paid was noted in my report from the start. Risks don’t always materialize, in this case it did. As the bad news unfolded since late April, I did not anticipate that the stock price would continue to react so negatively.

When the company was added back last October 9, the comment included “Those buying should perhaps make only a relatively smaller purchase. Be prepared for volatility.” It’s fair to say that I basically ignored that advice in my own trading and made it a larger position than perhaps such a small company should be.

In the update of April 7 I had noted that it was pricing in considerable growth in the range of perhaps 20% per year. I had not anticipated that earnings growth was about to be at least temporarily halted or probably reversed by the fee reductions.

It now seems apparent that the company has had some issues in its disclosures and could do a better job and be more candid.

At this point it still appears to be a profitable company with a good plan for growth. But given the fee reductions coming in 2018 it may take quite a long time to recover much of the recent decline. And it is certainly not without risk. It may be too dependent on the actions of the insurance companies and the gastrointestinal clinics where it provides service. When I ran the numbers for today’s update the analysis indicated that the company is now substantially under valued. As always there can be no guarantee of that.

It’s interesting that despite the fee reductions it found that upon review it did not have to write-down the value of its purchased intangibles. The company does not appear to think that even in retrospect of the fee reductions that it paid too much for the acquisitions.