U.S. Physical Therapy: Recession Resistant

Okay, it's not recession proof, but U.S. Physical Therapy (USPH) is a recession resistant health care service provider. USPH has an outstanding financial position with $35 million of an unused credit line, consistent stable free cash flow, and a proven management team that will enable it to continue expanding market share by exploiting the current lower multiples on overlooked smaller accretive competitors. U.S. Physical Therapy, Inc operates 349 outpatient physical and/or occupational therapy clinics in 42 states representing about 7% of this highly fragmented industry. From a macro point of view the long term economics of physical/occupational therapy can only improve with aging baby boomers and a country in less than perfect physical health.

The consistently high ROE currently at 14.10% screams out well managed company and the high earnings yield of 17.50% (EBITDA/EV) is proof of a bargain stock price. A sound capital structure is also contributing to the high and consistent ROE. Shares outstanding are basically flat over the past 4 years at 11.96 million shares and proof of a shareholder friendly management. The recent quarter reported significant top and bottom line improvements. Comparative third quarter 2008 results versus Q3 2007 improved with revenues +26% to 47.20 million, net income +19%, same store revenues + 3.40%, same store visits +2.80% offset with a .01 EPS negative impact from Hurricane Ike.

Additional indications of value

Proven value institutions holding USPH include Royce & Associates - 12.71% TSO (total shares outstanding), FMR LLC - 4.48%, O'Shaughnessy Asset Management - 4.71%, with shares acquired at higher than current prices. Key insider buys include the CFO purchasing 2000 shares on the open market (11/10/08) for $13.60 and 1000 for $9.61 on 11/21/08.

• EBITDA/EV =2.50/14.28 = 17.50%
• CFFO/EV = 2.29/14.28 = 16.03%
• CFFO/MC =2.29/12.38 =18.49%
• EV/NI = 14.28/.857 =16.66%
• FCF/EV = 1.93/14.28 = 13.51%
• FCF/MC = 1.93/12.38 =15.58 %
• CFFO/NI = 2.29/.857 = 2.67%

The above indicates the high quality of earnings yield.

• ROA TTM = 14.31
• ROA 4 yr average = 11.25

The company makes consistent productive use of assets as measured by ROA.

USPH ranks near the top for this measure in the specialized health care industry.

• Share count average past 4 years = 11.60 million
• Share count TTM = 11.96 million

No dilution in share count indicates a priority for shareholder value.

• P/S (Price/Sales) average over the past 4 years = 1.28
• P/S TTM = .76
• P/B (Price/Book) average over the past 4 years = 3
• P/B TTM = 1.87

Both price to sales and price to book are selling at historical discounts.

Per share data

Current Price is $12.38.

• EV = $14.28
• 52 low = $9.00
• 52 high = $21.00
• CFFO = $2.29
• FCF = $.1.93
• EBITDA = $2.50
• NI = $.857
• Cash = $.765
• A/R = $2.33

To summarize, as I stated above U.S. Physical Therapy is well managed and selling at a discount. I believe this opinion is further supported by significant ownership held by proven value institutions, recent key insider open market buys, quality of reported earnings indicated by the strong free cash flow, low capital requirements to run and grow the business, potential customer demographics growing, an economic moat evidenced by a high and consistent ROE, high earnings yield supported by ample free cash flow, discounted valuations based on P/S and P/B compared to historical measures, A+ balance sheet, selling significantly off historical highs, very few shares sold short and double digit growth.

Risks

• Long lasting deep recession
• Reduced insurance coverage driven by companies implementing cost savings
• Government changes in covered health care procedures

Disclosure: I own shares of USPH.

Comments

[GloomBoom.com:]

I'm conservative. I'm buying gold!!!

Jan 18 03:43 PM

[John DiStan...:]

You many be right but

Buffett emphasized the non-productive aspect of gold in 1998 at Harvard: "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." In 1977 Buffett was also quoted as saying about stocks, gold, farmland, and inflation: "stocks are probably still the best of all the poor alternatives in an era of inflation - at least they are if you buy in at appropriate prices."

Maybe think about ETF in agricuture such as sugar (sgg), POWERSHARES DB AGRIC (dba) or metals, oil (USO)

Good luck

Jan 18 11:10 PM