Don't Fight The Health Care Current, Swim With The Urgent Care Tide

Includes: CGHC, CVS, HUM, WBA, WMT
by: Tal Ben-Ami

One of the best and surest ways to make money in manipulated markets is to remember and apply that time honored adage, "If ya can't beat'em, join'em." By manipulated markets I mean markets massaged with money extracted from people in a forced transaction rather than a voluntary one. The only entity that can do that legally is government. So if the government is forcing money in one direction, it is best to find the river and swim with the current. There are only two things you need to know how to do. The first is you need to know where the money is going, in other words, how to find the river in the first place. The second is, you need to know when to grab onto a branch and exit with your manipulated market profits before you end up hitting a waterfall.

And so it goes with the healthcare sector. Money is definitely being forced in a specific direction, that direction being from consumers to health insurance companies, as pretty soon we will all be forced to buy health insurance. The obvious move is to buy health insurance companies, but the obvious move is never the best one because people front it in anticipation. I'm not the only one who ever thought of buying health insurance stocks when Obamacare passed, and it is likely that many already have. There will be gains, but they won't be as big as many think. In river terminology, the main route is too crowded. Instead, let's find a tributary.

Humana (HUM) gives a clue where to go

At $12.6B, Humana is the 5th largest health insurance company by market cap. It is an obvious pick for anyone betting on Obamacare money to enter the sector big in 2014. That's not why it's interesting. Rather, a specific direction that Humana is taking requires attention, and that is urgent care centers. These are cheaper, quicker, mini emergency rooms that will most likely be dealing with the increased supply of insured patients in 2014. With emergency rooms overcrowded as it is, urgent care centers will be sorely needed.

Humana's revenues increased $3.2B from 2010 to 2011, about 10%. But a very disproportionate amount of that revenue gain that year came from its acquisition of Concentra, a chain of urgent care centers, at the very end of 2010. While overall revenues were up 10%, their Health and Well-Being Services revenues which consists primarily of Concentra clinics, increased 145% (page 57). Consolidated services revenue continued to grow in 2012 at 27% (page 49) also due to growth in Concentra operations. So growth there continued to outpace overall revenue growth last year as well. That's the right tributary.

Walgreens, CVS, and Wal-Mart could compete to roll up the niche

Humana is one thing, and gives a clue as to the growth potential of the urgent care niche with its Concentra acquisition. A less obvious place to look in order to jump in would be Walgreen (WAG), CVS (CVS), and Wal-Mart (WMT). All three are trying to master this market, and while some are doing better than others, none of them have succeeded with flying colors yet.

Walgreen operates at 8,537 pharmacy locations around the country. 371 of those are Take Care Clinics, Walgreen brand urgent care facilities, what they list as health and wellness centers. That's about 5% of the country's estimated 8,000 urgent care clinics. From 2011 to 2012, the number of Walgreen drugstore locations increased 3%, and the number of wellness centers 5%. Walgreen is going to have to pick up the pace of those centers and run them well if it wants to see Humana/Concentra type growth and stop plateauing on revenue which has declined annually 1% since 2011, income shrinking 22%. We saw a little spurt of it with Walgreen's quarterly earnings report late last February with 8% revenue growth and a huge 83% jump in earnings. If those numbers continue and Walgreen really gets its urgent care segment moving next year with Obamacare, WAG will barrel through its all-time highs of over $51 back in 2006 when it only had 5,461 stores (36% less than today) and no Take Care Clinics (100% less than today). WAG paid a $1.00 annual dividend in 2012, on pace for $1.12 per share this year.

Out in front of Walgreen on the urgent care front is CVS, with over 650 clinics nationwide, 633 of them located within CVS pharmacy stores, total number accounting for over 8% of the nation's 8,000. CVS' urgent care clinics are branded MinuteClinics, and the company plans on expanding them to 1,000 by 2016. MinuteClinics are reportedly break-even as of the end of 2011.

CVS' quick expansion of its urgent care services and the fact that it only operates 7,400 stores nationwide compared with Walgreen's 8,537 and yet has an annual income 82% higher despite having 13% less stores shows that CVS is really just a better company. The downside being that CVS is already at its all-time highs at $55 on a 72% move higher over the last two years. (Chart Below)

(Click to enlarge)

Good thing central banks are having a money-printing war or that wouldn't be sustainable, even for a company as good as CVS. With an annual 65 cent dividend upped to 90 cents for 2013, I'd say buy on a pullback, scale in, and drift with the Obamacare MinuteClinic current into 2014, exiting before 2016 in case somebody should heaven forbid actually win the money-printing war.

The black sheep though in terms of failing at Urgent Care is Wal-Mart. Perhaps it was a fit of corporate-giant-type hubris, but Wal-Mart decided, in 2007, to:

  1. Brand its clinics "The Clinic"
  2. Predict 2,000 open by 2012
  3. Forgo advertising, even forbid outdoor signs or housing of "The Clinic" in any Wal-Mart superstore
  4. Basically ignore "The Clinic"s, bringing in third parties to run them and trying out the landlord model as opposed to the be-involved business model of Walgreen and CVS.
  5. Expect this to actually work

Wal-Mart now has 130 clinics and is closing them faster than it is opening them.

Despite the failure, the wildcard for all three companies is going to be any possible roll-up strategy when the current really starts to move with Obamacare. All together, Walgreen, CVS, and Wal-Mart run 15% of the nation's urgent care clinics. Most of the others, says Forbes, are not even profitable, being that they are run by nonprofits:

Most of these facilities are run by nonprofit health systems like Aurora Health Care in Wisconsin, which has 37, or Utah's Intermountain Healthcare, which has 25 and was the often-mentioned example of low cost and high quality care cited by President Obama during the debate that led to passage of the Affordable Care Act.

Interesting that a non-profit example would be made to support the viability of Obamacare, as nonprofits are inherently unviable if not for the generosity of others, but that's another story. The question is, when urgent care centers really do start making a lot of money, are Walgreen, CVS, and Wal-Mart going to descend on the market and buy up some of these small companies to get the edge?

Perhaps, the biggest gains will be made in buying those small companies now before they do. Of course, many are microcaps so keep position size small for this kind of bet and stick with CVS and WAG in the main. However, one interesting company to look at for further study is Capital Group Holdings (OTCPK:CGHC). CGH operates 7 urgent care centers in the Phoenix area and while it is not profitable, it has a decent balance sheet for a company its size and has upped its revenues 241% since last quarter to over $1.7M. Who knows, maybe even Humana will take notice before the other three. If CGH shows more revenue growth as it has been, putting up an offer for a $6M company would be like throwing a quarter into a guitar case for any of these names. With 2014 and Obamacare waiting around the corner, I'll go out on a limb and say someone is going to make it work.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.