Nobilis: Catalysts Coming, But Management Must Restore Confidence

| About: Nobilis Health (HLTH)

Summary

Nobilis Health is still suffering a lack of investor confidence despite clearing up most of the uncertainties about its financial reporting and guidance.

The numbers the company plans to release on January 20 -- namely 2015 preliminary estimates and 2016 guidance -- will be important in helping to restore confidence.

But even more important will be management's upcoming road show to convince institutional investors to buy large amounts of Nobilis stock to get the price up.

Negative sentiment about the company is still dominating trading and the shift needed can only be accomplished if more fund managers step up to the plate.

This is all critical for the company's future growth plans because it has said it needs a higher stock price to do the large acquisitions that shareholders expect.

A key take away from the conference call held by Nobilis Health Corp. (NYSEMKT:HLTH) on January 14, 2016 is that management is starting a marketing tour (investor road show) after it publishes 2015 preliminary estimates and 2016 guidance on January 20.

The meetings with fund managers are something they absolutely need to do after the uncertainty caused by the company's announcements last fall that there would be a change in auditor, a delay in Q3 financials and restatements of previously reported financials.

The company released the delayed Q3 financials and the restatements on January 12, 2016 and had a conference call to explain the changes and answer questions.

But that obviously was not enough to restore confidence, as the subsequent decline in the stock price indicates.

The upcoming road show is a critical move in the process of restoring confidence. Publishing positive numbers is a necessary condition of building confidence, but it is not sufficient by itself.

What Nobilis needs for a rapid share-price recovery is for institutional investors to buy large amounts of the stock and to do it soon -- in order to overwhelm the negative sentiment still dominating trading.

So, the meetings management is scheduling in the coming weeks with institutional fund managers and brokerage sales desks will be crucial.

Since these meetings are not public and we won't know what happens in them, they won't get much attention.

However, these meetings will be far more important than the stock buy-back that management said the board is considering (not decided yet) or even if insiders buy stock when the trading restrictions are lifted (they haven't said they would but it is possible they might if they are not restricted by knowledge of the deals they said they are working on). Such moves can be positive catalysts, and companies often believe that such actions would be enough by themselves, but they are not if fund managers believe there are other issues.

Fund manager meetings can be tough

Anyone who has participated in such meetings knows that they are not going to be easy for a company that has had some self-generated difficulties. Fund managers often take the view of when in doubt, don't invest, and it takes a lot to bring them around. And since not all will come around, management may need to have quite a few meeting in order to get the critical mass of buying that is needed.

Success will depend on not just the quality of the presentation and investment opportunity, which has to be good, but also on whether the fund managers come away with the impression that it all should be believed and acted upon. That's why conference calls or even video calls are not enough for most fund managers. They want management in the room so they can observe non-verbal signals (the body language) when their questions are being answered.

The January 20 announcement should be favorable

In the October 2015 investor presentation on its website, Nobilis estimated 2015 revenue at $233 million and EBITDA at $42 million -- putting the EV/EBITDA ratio at about four, as noted in a previous article on the company. The ratio is far below what would be normal for a fast growing company like Nobilis has shown itself to be, and it is well below the average of 10 for similar health care companies.

On the conference call, management indicated that, while not all the numbers are in yet (collections can take up to two months), revenue for the year is extremely strong and should come within plus or minus 5% of the earlier 2015 estimate. No hints about EBITDA.

Smaller acquisitions possible, big acquisitions on hold

Nobilis has used its stock as a currency to pay for acquisitions. Sellers often are willing to take stock instead of cash for tax reasons or because they believe the stock will rise in the future.

But the company indicated on the call that they don't want to use the shares in that way or to issue new shares at this time because it would excessively dilute existing shareholders. They said the current stock price is too low. The company had several possible large acquisitions in front of it last fall but they were put on hold when the stock price dropped.

In the meantime, with plans to use either cash or bank debt, the company is talking with five possible smaller acquisitions and expects to announce one in Q1.

Cash balances at the end of Q3 2015 were $21 million and long-term debt was $22 million. Management indicated on the call it would be comfortable with debt of 3 to 4x EBITDA and that they had seen loan proposals from banks coming in at up to 4.5x EBITDA. With current long-term debt at about 0.5x estimated EBITDA, they have room on their balance sheet room to do some acquisitions if they choose to use it.

But to do the big acquisitions -- the ones that require the issuance of stock and that would give shareholders the kind of growth they are expecting from Nobilis -- management said the stock price needs to be higher.

Summary

The stock still is a buy given the catalysts coming up, including the January 20 announcement, possible share buy-backs, and the company's plan to do some acquisitions.

However, near-term share price performance will depend on how management performs in its meetings with fund managers. Confidence among institutional players is lacking and has to be restored.

Disclosure: I am/we are long HLTH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.