Conmed Earnings Preview - Still Undervalued

Conmed Healthcare Management (CONM) is scheduled to report June quarter results on Wednesday this week after the market close. A conference call is scheduled for the same afternoon. We have an estimate of $0.02 EPS on $13.0 million in sales for the quarter. There are no other published estimates for the Company. We expect more details from management on the business pipeline as well as recent successes with contract renewals and new contract awards. Last week the Company announced that a collection of contract renewals and upgrades over the last six months have resulted in $2.0 million in incremental revenue. We estimate the revenue run rate for existing business increased to $54.0 million beginning July 2009. This is more than double the run rate reported eighteen months ago in March 2007.

Shares of Conmed Healthcare Management were recently listed on the NYSE Amex exchange under a new symbol - CONM. We expect achievement of national market listing to expand the potential investor base as institutions that are prohibited from holding over-the-counter listed securities are now able to take positions in the stock. Furthermore, national market listings also opens the door to solicitation by registered representatives are brokerage firms.

The time of the listing change could not be more precipitous as the June through August time period is the most active in the local government market where Conmed operates. Local governments prefer this period to let new contracts. We also believe that the door to acquisitions opportunities opens wider following the contract letting period as small operations are more disposed to buyout offers, particularly from national market listed companies. Our logic is that unsuccessful bidders may lose their palate for competition and even the successful bidders may find themselves burdened by new contractual obligations and in a capital crunch. The situation bodes well for collaboration or sales to larger public providers.

We continue to view the Company as undervalued given the long-term growth opportunities in the market for outsourced health care services in local detention centers. The market is composed of 3,000-plus county jurisdictions in the U.S., among which there appears to be a growing interest in outsourcing of health care to professionals. Yet the provider base remains highly fragmented and localized in orientation save for Conmed and three or four other entities that have gained national and regional traction. Accordingly, we believe that Conmed is well positioned to gain both new customers through direct competition in the bidding process and through acquisition.

Disclosure: Neither the author of this article, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.