CRH Medical updated November 3, 2017

CRH Medical is updated and rated Speculative (lower) Strong Buy at U.S. $1.85 or Canadian $2.37. This one has been a huge disappointment as it is down 57%  since it was added to the site on October 9, 2016 rated Speculative Buy at U.S $4.32. And it is down about 80% since the high of about U.S. $9.00 that it reached in early April (and when I still thought it looked like good value due to the growth).

Its latest drop was about 16% today after government-mandated reductions (effective January 1) to the prices it charges for its services were finalised this morning and which included not only the expected reductions that had largely been responsible for the sharp share price decline but an additional important fee reduction. On the conference call yesterday it appears that the company was quite certain that only the expected reduction would occur.

In addition to the fee reductions in 2018 there has been a reduction in revenues per patient this year due to a change in payer mix (more government, less commercial insurance) that the company appeared to be very slow to realize was even happening.

So, clearly some reduction in the share price from the April highs was absolutely warranted. But it appears to have been over done. The company remains profitable and is generating good cash flows and its growth-by-acquisition strategy remains fully in place. Granted, it is not clear what the profit level will be after the fee reductions are in place in January but indications are that he company will still be profitable and generating good cash flows.

Overall, the valuation appears to be quite attractive. With good cash flows, the company is not in danger financially and in fact plans to continue to make acquisitions at the same pace as the past two years.

But this remains a speculative pick and the original indication from October 9, 2016 to consider making only a relatively smaller purchase is perhaps still wise.

It will be interesting to see if insiders step up and buy shares at this latest low price.

One analyst pointed out that there may be tax-loss selling which could keep the price depressed through year end. On the other hand the company mentioned yesterday that it hopes to take some action to boost the share price.

I added to my own position in this stock on several occasions as the price declined since April. At the current price it represents about 1.4% of my portfolio. I may add somewhat at this price although my enthusiasm to do so is certainly tempered by the experience so far.

In general, the analysts that recommended this stock at far higher prices have been embarrassed by the result and may be unlikely to recommend it again anytime soon. That could mean the stock will be a long time recovering. But ultimately earnings over the next several years will determine the stock price.