By Jenny Liu, LeverageEquityResearch.com
HealthStream Inc. (HSTM) is a small healthcare software company with a market capital of $700 million. It provides a web-based solution for healthcare organizations allowing them to train professionals, employees. In addition the software monitors their credential and privilege records. The company has achieved annual sales revenue growth and free cash flow growth at a 20% clip Y/Y over past the five years. HealthStream has an attractive profile with 71% institutional ownership and 20% insider ownership as well. HealthStream has minor liabilities without long-term debt and all of its three top shareholders added shares steadily in the recent quarter.
HealthStream's stock price soared from $4 in 2010 to $40 per share in 2014 and then slid gradually towards $20 after HealthStream's net income suffered significant setbacks last year.
According to the 10-K for FY 2015, revenues were up 22% to $209M, while operating income was down 17.2% to 13.5 million. Net income was down 17% to $8.6 million, and EPS was 0.28 comparing with 0.37 in 2014.
HSTM data by YCharts
In 2015, HealthStream maintained $34 million cash flow from operating activities, a similar figure to 2014 levels. However, the company paid $88M cash to buy HealthLine Systems last year. A key reason for the acquisition of HealthLine was because the U.S. Center for Medicare and Medicaid Service requires hospital systems to monitor credentials and privileges as a prerequisite for federal reimbursement. HealthLine tracks healthcare provider credentials and privileges such as specialties and the facilities where they are licensed to practice. The Heathline systems acquisition is expected to bring in sustainable revenue growth for HealthStream over the long term. HealthStream issued $98M stock in 2015 to fund the $88M acquisition.
In addition to the acquisition cost, increased R&D, and Sales expenses related to launching new products were also accounted for the decrease in net income in last year.
Last year the U.S. Department of Health and Human Services mandated a new ICD-10 code sets for all inpatient medical and mortality reporting requirements effective Oct.1, 2015. The mandatory policy had boosted the company's revenue significantly in 2013 and 2014. Since it has passed the deadline for new coding implementation, the Workforce Solution Segment in HealthStream is expected to suffer a $20 million revenue decline in 2016.
HealthStream revenues consist of three business segments: Workforce Solutions (77%), Patient Experience (16%), and Provider Solutions (7%).
Workforce Solutions offers subscription-based products, used by healthcare organizations to meet a broad range of talent management including training, certification, competency assessment, and performance appraisal.
Patient Experience offers customers with patient, employee and physician's surveys and solutions for the customers based on the data analysis of survey results.
Provider Solutions, known as Echo, enables healthcare organizations to launch paperless credentialing processes which reduces provider enrollment timelines and improves validation process.
Although there is a headwind for the healthcare software industry, HealthStream has maintained a strong balance sheet. By the end of 2015, it held $149M cash and a $50M revolving credit line with total liabilities amounting to $99M without long-term debt. The board also approved a $25M stock repurchase plan this year.
According to the latest earnings call, the company is actively looking for more acquisition opportunities in 2016. It acquired Baptist Leadership Group (BLG) in 2013, Health Care Compliance Strategies, Inc. (HCCS) in 2014, and HealthLine Systems, LLC (NYSE:HLS) in 2015.
The top three shareholders in HSTM are:
- Fidelity (15%)
- Vanguard (6.02%)
- BlackRock (5.53%)
All three institutional owners added more shares last year to support its expansion plan. CEO Robert A. Frist Jr held 16% of its shares - shareholders' interest is in the mind of the management team, always a good sign.
Healthcare education, training, and credential process are the mandatory requirements for hospitals professionals and healthcare providers. Due to the decrease in government reimbursement rates, the hospital industry faces intensive pressure to reduce cost --which includes training and continued education cost. HealthStream is providing an efficient and convenient solution to meet customers' needs. Its market share is projected to increase steadily in long-term. 2016 revenues are expected to grow at 7%-12%, including the impact of ICD-10.
From valuation consideration, HealthStream is reasonably valued with a P/E 77.9, P/B 2.5, P/Sales 3.2, and P/Cash Flow at 19.2. Before Obamacare stimulation, its valuation ratios in 2008 were P/E 18.1, P/B 1.4, P/S 1.0, and P/Cash Flow 8.6. Further price sliding may continue in 2016. However, the company's strong balance sheet and sustainable revenue stream will help it to weather the coming storm offering patient investors a good buying opportunity in the near future.
Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.