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Pacific Health Care Organization (OTCQB:PFHO) through its subsidiaries, provides various workers’ compensation solutions to employers in California. Its services include managing and administering health care organizations (HCO) and medical provider networks; implementing and administering workers’ compensation carve-outs; utilization review; medical bill review; and nurse case management services. PFHO has been rapidly growing revenue and EPS for a number of quarters.

THE QUICK SUMMARY BY LAST QUARTER'S NUMBERS:

(1) Sales up 53% to $1,326,801

(2) Net income up 149% to $186,573

(3) Earned $0.23/share last Q. Annualized PE ratio of around 5.4

(4) Record sales and earnings. Forecasts more.

(5) Enrollees up 74% in the last 2 years, revenue per enrollee up 101%

THE DETAILS:

In uncertain economic and world crisis times, healthcare is one defensive sector which has provided consistency, safety, and reliability for investors over time. One thing investors have been able to count on since the beginning of time is that people will grow old, get sick, get injured, and die, and there will always be a market to prevent, delay, care for, and improve the lifestyle of us all facing these risks and eventual inevitabilities of life.

As with all sectors, there are various companies within healthcare that trade at vastly different levels versus others in the same sector and different ones will provide varying returns for investors over time. Within the healthcare sector, PFHO is the most undervalued company and stock I can find based on earnings, growth rate, forecasts, and historical ability to meet its forecasts.

PFHO is an off radar smallcap company within the Specialized Health Services that has been showing a percentage explosion in sales and earnings per share (NYSEARCA:EPS). In Q3 2012, PFHO reported year over year sales growth of 53% from $864,397 to $1,326,801 and earnings growth of 149% going from an EPS of $0.09 to $0.23 with forecasts of more growth ahead. PFHO has been reporting profitable growth results like this for numerous quarters in a row. While PFHO doesn't currently have any analyst estimates, if you annualized the last quarter's results you get an EPS of $0.92 (trailing 4 quarter EPS is $0.72). With a closing stock price of $4.95 as of 12/3/12, that gives PFHO an annualized PE of just 5.4, well below and cheaper than any credible and earnings stable healthcare stock that I can find.

How stable are PFHO's earnings? While nobody can tell the future with 100% certainty with any company, PFHO's recent history in terms of a variety of different metrics tells the tale of predictable growth any way you look at it. Below is a table of the trend:

QuarterEPSRevenueEnrollees$ per Enrollee
Q3 '12$0.23$1,326,801442,0003.00
Q2' 12$0.23$1,123,911403,0002.79
Q1 '12$0.20$1,065,457388,0002.75
Q4 '11$0.06$803,893370,0002.17
Q3 '11$0.09$864,397348,0002.48
Q2 '11$0.06$613,677318,0001.93
Q1 '11$0.03$549,826288,0001.91
Q4 '10$0.05$542,550286,0001.90
Q3 '10-$0.01$379,151254,0001.49
Q2 '10-$0.04$346,400245,0001.41

Now let's compare the PFHO valuation to various other more familiar "on radar" names in various other industries within the healthcare sector. such as:

Addus HomeCare Corporation (NASDAQ:ADUS) provides a range of social and medical services to individuals. The company serves individuals with special needs who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill, and disabled.

Almost Family, Inc. (NASDAQ:AFAM), together with its subsidiaries, provides home health services. The company operates in two segments, Visiting Nurse Services and Personal Care Services.

The Providence Service Corporation (NASDAQ:PRSC) provides and manages government sponsored social services and non-emergency transportation services. It offers home and community based counseling services, which include home based and intensive home based counseling, substance abuse treatment services, school support services, correctional services, and workforce development; and foster care and therapeutic foster care services.

Lannett Company, Inc. (NYSE:LCI), together with its subsidiaries, develops, manufactures, packages, markets, and distributes generic versions of branded pharmaceutical products in the United States.

Anika Therapeutics, Inc. (NASDAQ:ANIK), together with its subsidiaries, develops, manufactures, and commercializes therapeutic products for tissue protection, healing, and repair. Its products are based on hyaluronic acid (NASDAQ:HA), a naturally occurring biocompatible polymer found in the body.

RadNet, Inc. (NASDAQ:RDNT) provides outpatient diagnostic imaging services in the United States. The company offers various imaging services, including magnetic resonance imaging, computed tomography, positron emission tomography, nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy, and other related procedures.

COMPARISION STRICTLY BY THE NUMBERS

 EPS*Annualized PESales GrowthEPS Growth
PFHO$0.235.453%149%
ADUS$0.199.42%12%
AFAM$0.4610.8-1%-12%
PRSC$0.2812.519%87%
LCI$0.0717.822%133%
ANIK$0.1127.2-20%-50%
RDNT$0.0747.026%133%
* excluding one-time items

As one can clearly see from the table above, PFHO dominates in value not only on a PE ratio basis but with rapid growth on both sales and EPS. Normally fast growers are rewarded higher PE ratios rather than smaller. If PFHO can continue on the path that they are on, the potential for more price appreciation is enormous. Risk-wise PFHO doesn't have the long history of stable earnings that its healthcare peers above as. Also with any company growing rapidly there's a risk that they will grow too fast and stumble, unable to manage their own rapid growth.

From an investment point of view, investing in healthcare names can be somewhat boring. It's historically a relatively slow growth industry to be analyzed strictly by the numbers. But boring can be quite profitable, especially if you select the one that's most undervalued by the those numbers. PFHO is a very much off radar and thus the most under valued name. How long it will stay undervalued is anyone's guess, but with PFHO up around a 10 bagger in the last year history suggests it won't be long.

Source: Pacific Health Care Organization: A Very Undervalued Healthcare Stock