At the end of year it is common to look back and reflect. Were we naughty or nice? What evils befell us? What did we accomplish? Was there meaning in our lives? Usually the only thing I consider is whether we ended up with good stock picks for the year.
However, during this holiday season I am looking at our coverage of one particular company - Conmed Healthcare Management (CONM). Conmed provides health care services on contract to country and municipal detention centers. The company serves fifty-one clients in seven states, caring for over 17,000 detainees. It is a solid business. We expect Conmed to generate over $4.0 million in cash flow from operations in 2009, on $54.0 million in revenue. New contracts and possible acquisitions are in the pipeline.
In the last two weeks, Conmed announced the renewal of two significant contracts with the largest and third largest contracts in the Company’s portfolio. Pima County in Tucson, Arizona renewed a contract to receive a menu of health and behavioral care services from Conmed, extending the relationship to June 2012. The value for the two-year period is valued at $19.5 million, or $9.75 million per year. The renewal comes seven months ahead of the current contract term at the end of June 2010, signaling a clear interest on the part of the county to lock in a both a level of service and pricing. Conmed originally began work for Pima County in June 2008, when Pima County terminated a relationship with another inmate health care outservice provider in favor of Conmed.
The second renewal in as many weeks is with Sedgwick County in Kansas for the period of January 2010 to December 2014. This contract is valued at $22.5 million, or $4.5 million per year for the four year period. Conmed is in a three-year relationship with Sedgwick County.
The two renewals extend Conmed’s bragging rights on a 100% renewal record over its history as a provider of outsourced health care services for municipal and county jails. No other jail health care provider can make this claim. We believe the Company’s ability to retain customer relationships stems largely from the high-tough, meticulous approach management takes to interfacing with county officials and personnel, from the lead decision makers on the county commission all the way down to corrections officers who are watching over inmates. While this does not preclude problems from cropping up, we believe it does make it possible to correct problems before costs escalate and misunderstandings arise that can sully contractual relationships. We also believe that Conmed’s operating procedures head off potential problems that can undermine the accreditation local jails must achieve to remain in operation.
Besides making an attractive bullet point in the Company’s sales pitch to prospective new clients, we believe the contract renewal rate signals a higher quality recurring revenue stream. In our view, more reliable recurring revenue should garner a premium valuation over the Company’s peers group of inmate health care services and other outsourced services providers.
We probably would not have looked past those metrics and the share price were it not for listening to the late night radio show of rock musician Alice Cooper. (Yes, he is old and more than must a little eccentric, but he spins some great rock and roll if you are into the genre.) He dedicated the show to people in jail, citing how tough it is to be in jail during the holidays. Alice called them “the least among us.”
Yes, Conmed is in business and turns a profit. However, their track record in quality of care compared to their competitors suggests the Company and its employees are doing what all the major religions call us to do - serve the least among us.
While we do not include social investing priorities in our stock selection criteria, certainly CONM shares have a place in a socially oriented portfolio.
Disclosure: Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has an Accumulate rating on CONM shares.
Disclosure: None
