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Summary

  • There is something big in PFHO's 10Q that the street seemed to have missed.
  • PFHO continues to outperform competitor CRVL.
  • Look for revenue and earnings to continue to explode.

Oftentimes with microcap companies they are forever a "next quarter" story. "This quarter stunk, but next quarter will be the big one!" And that quarter never seems to happen. With Pacific Health Care Organization (OTCQB:PFHO), it's the opposite. Every quarter is the big one, quarter after quarter for about three years now, and PFHO continually stuns the street and runs to new highs.

Despite the steady stream of new record quarterly gains in sales, earnings, and share price, there was something in the 10Q filed with the SEC that I think a lot of investors missed that is evidence PFHO may shock the street more than ever with the second quarter report. I'll get to that later.

But first, to update, last quarter I compared PFHO to CorVel Corporation (NASDAQ:CRVL) as both companies provide services and solutions to reduce workers' compensation costs, At the time they both traded around $50 per share, and based on CRVL's fundamentals I pegged a $100 price target on PFHO.

PFHO reported on Wednesday, May 13 its first quarter results. Revenue and earnings hit new records. Revenue increased 47% to $2 million and earnings increased 124% to $0.56 per share. Tangible book value is now at around $4.00 per share compared to CRVL's $3.67. The cash balance per share is now at $2.16 up from $1.58 three months prior.

Since my last report, CEO Tom Kubota bought 400 shares in the open market for $19,200. CRVL insiders haven't reported any additional selling, but they haven't bought any either. Here are something interesting updated metrics in light of the last report:

Quarter

EPS

Revenue

Enrollees

$ per Enrollee

Q1 '14

$0.56

$2,028,669

597,000

3.40

Q4 '13

$0.51

$1,892,818

578,000

3.27

Q3 '13

$0.42

$1,703,570

548,000

3.11

Q2 '13

$0.36

$1,592,608

550,000

2.90

Q1 '13

$0.25

$1,384,110

537,000

2.57

Q4 '12

$0.23

$1,311,000

516,000

2.54

Q3 '12

$0.23

$1,326,801

442,000

3.00

Q2' 12

$0.23

$1,123,911

403,000

2.79

Q1 '12

$0.20

$1,065,457

388,000

2.75

Q4 '11

$0.06

$803,893

370,000

2.17

Q3 '11

$0.09

$864,397

348,000

2.48

Q2 '11

$0.06

$613,677

318,000

1.93

Q1 '11

$0.03

$549,826

288,000

1.91

Q4 '10

$0.05

$542,550

286,000

1.90

Q3 '10

-$0.01

$379,151

254,000

1.49

As for risks, they remain the same as last quarter. Mainly:

Regarding the potential changes in government regulations that are risks to both Pacific Health Care and CorVel but possibly more-so Pacific Health Care due to its higher concentration in the state of California, this is from the 10K filing. See especially the bold:

Managed care programs for workers' compensation are subject to various laws and regulations. The nature and degree of applicable regulation varies depending upon the specific services provided. Parties that provide or arrange for the provision of healthcare services are subject to numerous complex regulatory requirements that govern many aspects of their conduct and operations. Because managed healthcare is a rapidly changing and expanding industry and the cost of providing healthcare continues to increase, it is possible that the applicable federal and state regulatory frameworks will expand to have a greater impact upon the conduct and operation of our business.

As discussed above, the provision of workers' compensation managed care in the state of California is governed by legislation and secondary regulations. The services we provide have developed largely in response to legislation or other governmental action. Changes in the legislation regulating workers' compensation may create greater or lesser demand for the services we offer or require us to develop new or modified services to meet the needs of the marketplace and compete effectively. We could also be materially and adversely affected if the state of California were to elect to reduce the extent of medical cost containment strategies available to insurance companies and other payers, or adopt other strategies for cost containment that would not support demand for our services.

There has been considerable discussion of healthcare reform at both the federal level and in the state of California in recent years. Due to uncertainties regarding the ultimate features of reform initiatives and the timing of their enactment, we cannot predict which, if any, reforms will be adopted, when they may be adopted, or what impact they may have on our business or within the industry in which we participate. However, the most recent statutory change in California Workers' Compensation was SB 863, which had various provisions that became effective January 1, 2013 and others on January 1, 2014. While the general provisions effecting MPNs, utilization review, and bill review were favorable for employers, showing the importance of these programs and possibly expanding appeal and usage, other provisions created requirements on MPN administrators that many in the industry consider difficult to comply with. We have had and anticipate we will have a much easier time complying with these provisions than many of our competitors, since many of these requirements were similarly required under HCO regulations and already exist within our operations. Some examples of the new requirements include the Medical Access Assistant, the Physician Acknowledgement mandates, and quality assurance reviews of MPN providers.

And finally, the reason I believe the second quarter will could and will be a huge hit. Recall in my last article, I stated:

Historically, any time the company has used the word "moderately" a significant sequential jump in revenue and EPS followed.

Normally in the 10K or 10Q, the company forecasts revenue to rise "moderately" or "slightly." PFHO has a bit of a reputation for being very conservative. For this most recent 10Q filing, for the first time, PFHO stated it as:

We expect increases in revenues to continue in the second quarter of 2014, when compared to the second quarter of 2013.

Absent were the words "moderately" or "slightly." It may sound at first like I'm reaching but if you've been following this company as closely as I have you'll understand. For PFHO to remove the cautionary adverbs "moderately" or "slightly" suggests a blowout quarter. An additional piece of evidence from the filing includes this line:

We expect current levels of general and administrative expenses to increase by approximately 15% to 20% over the remaining months of 2014.

Given that sales and earnings have been growing continuously faster than general and administrative expenses, it seems reasonable to speculate at a bare minimum that sales and earnings will also be increasing by 15% to 20% on a sequential basis and likely much more (otherwise why bother?).

Next:

We expect most of this increase to be generated from services offered by the Company to existing and new customers.

This implies that revenue per existing customer will go up in addition to generating new customers.

Finally:

We currently have planned certain capital expenditures during the next twelve months to accommodate our growth.

Conclusion: Pacific Health Care Organization continues to be the better buy over CorVel Corporation with much higher potential though it does carry with it much higher risk especially in short term day-to-day trading. Given all of the evidence above though, I expect the balance of the year to be a killer.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: A Hint That Pacific Health Care Organization's Next Quarter Will Be A Killer