Dutch Trader's  Instablog

The landscape of healthcare is changing and whoever is smart will watch closely. With the introduction of Obamacare in 2013, the US stands to see a substantial increase in the number of insured individuals. And because the correlation between time and age has always been positive, Uncle Sam will be attending to millions of North Americans turning 65 yearly, their growing healthcare bill in tow.

While the US moves towards a government dominated system, familiar in Europe and Canada, the latter are beginning to loosen the reigns, creating an interesting effect where the two systems shall meet in the middle.

After reading Bain and Company's 2013 Global Healthcare Private Equity Report, I became interested in acquisition targets in the healthcare services field. One such target, Greenestone Healthcare Corp. is positioned well for growth, trading in the US while operating in Canada, where supplementary care is attractive and in high demand. The company could quite possibly be a diamond in the rough, easy to miss if you are not watching.

In total, $21 billion worth of private equity capital was invested in healthcare companies in 2012. The shape of deal activity shifted in 2012, with fewer mega-deals and more middle market deals. Interest in the healthcare provider and services sector outstripped other sectors in 2012.

Top 10 healthcare private equity buyout deals announced in 2012

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The provider and services sector leads North American buyouts, while activity is more evenly distributed in Europe and Asia-Pacific.

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Macro Environment North America

Healthcare private equity buyout activity in North America is dominated by the US where both cost pressures and incentives to contain costs are robust. US-based employers, especially the larger employers that typically subsidize healthcare insurance for employees, have long been trying to contain their costs for pragmatic reasons. Legislative reforms-namely the Patient Protection and Affordable Care Act (PPACA)-are expected to accelerate the trend by creating more incentives for healthcare organizations and insurance companies to reduce costs themselves while improving outcomes.

For the most part, private equity investors in the US are looking to ride the trends that have been set in motion or accelerated by healthcare reform, such as cost containment, payment reform, new care-delivery models and hospital-physician alignment, without getting ensnared in the uncertainty about future reimbursement levels.

That theme has led to meaningful increases in the number of deals within the provider and services categories with more limited or indirect reimbursement risk, such as retail health, healthcare-related IT and outsourced services; however, an influx of new entrants in these "healthcare light" sectors is leading to increased valuations and trickier return equations.

Looking ahead, there is no question that healthcare investing remains attractive, thanks to the unique combination of stability and innovation it offers. Fortunately, some of the major drivers of the market are trending in investors' favor. Debt is cheap, making it easier to finance deals, and the hunting ground is large. At the same time, the stock market is rebounding and the appetite of strategic buyers remains strong, portending more and bigger exits. These are ripe conditions for investors with healthcare expertise to achieve excellent returns if they choose the right opportunities.

Within the provider and services sector that was so popular in 2012, consolidation opportunities should remain plentiful. Healthcare reform in multiple countries is intensifying the drive toward better outcomes at lower costs, such as in Canada, as more providers aim to get smarter about their operations, both in terms of supply chains and treatment outcomes.

Healthcare continues to be an attractive area not only for private equity investment, but also for private investors alike, thanks to its historically strong returns and low default rates.

The following three companies could be interesting acquisition targets going forward.

Vanguard Health Systems

Vanguard Health Systems, Inc. (VHS) is an operator of healthcare delivery networks with a presence in various urban and suburban markets. The company had 28 acute care and specialty hospitals with 6424 licensed beds with outpatient facilities and related businesses, which allow it to provide a range of inpatient and outpatient services in the communities it serves.

The company has about $6 billion in revenue and management. Blackstone, Morgan Stanley, and Capital Partners own 60% of the company. The stock trades around $15, with price targets between $15 and $18. Most analysts consider the company a BUY.

LifePoint Hospitals

LifePoint Hospitals (LPNT) was founded in 1999 and has grown to a leading hospital company with more than $3.5 billion in revenues and nearly 60 hospital campuses in 20 states.

The company's fourth quarter revenues from continuing operations grew to $893 million, up 14% from the same period last year. EBITDA was $135 million, up 3.8% over last year and EPS was $0.76, exceeding the high end of the adjusted guidance range. And for the year, revenues from continuing operations were up 12% compared to 2011. EBITDA increased 1.8% over the prior year and EPS was $3.14.

During 2012, LifePoint completed three hospital acquisitions with over $400 million in annualized revenues. Management indicates that their acquisition pipeline remains very active.

During the past several years the company has taken a deliberate approach to invest in growth opportunities and maintaining a balanced capital deployment strategy. Since 2010, approximately $470 million was spent to acquire nine hospitals with approximately $700 million in annual revenues.

During this same time, the company invested $600 million in CapEx to support organic growth and quality initiatives and the company repurchased $400 million in stock, representing approximately 20% of LifePoint's outstanding common shares.

Given LifePoint's strong cash flow, the company can invest more going forward without increasing leverage. The stock trades around $45, with price targets between $36 and $48. Most analysts consider the company a HOLD.

GreeneStone Healthcare Corp.

GreeneStone Healthcare Corp.(GRST.OB) is a Canadian healthcare company listed in the US focusing on mental health and behavioral treatment. The company is an attractive candidate to play the role of the next big healthcare sector private equity buyout target. The company has had early success building and operating a residential treatment facility, along with an outpatient and aftercare facility. With their 2013 expansion plans, GreeneStone is poised for its next major phase of revenue growth.

The company operates in a highly underserviced sub-sector of the healthcare space that has been undergoing consolidation in the recent past. Private equity and strategic buyers have scooped up many of the available facilities in the US at valuations averaging $800K - $900K per bed. With many niche service areas still untouched (such as eating disorders), GreeneStone is capitalizing on this opportunity by opening complementary practice areas through a 'buy and build' growth strategy.

On April 2, 2013 the company released their 2012 results. For the twelve months ending December 31, 2012, the company reported total revenues increase of 230% to $5,540,909, as compared to $1,678,804 for the same period in 2011. For the same twelve-month period, the company reported total net loss of ($1,553,797), or ($0.08) EPS, compared to ($2,462,288), or ($0.34) EPS for the same period ending in 2011.

This increase in revenue was mainly attributable to a steady increase in business volume since the company began operations. The company believes that revenue growth will continue to increase steadily and the company will become more profitable as most of its costs, such as rent and salaries and wages are relatively fixed, and therefore will reduce, as a percentage, as business and bed capacity volume grows.

Shawn Leon, President and Chief Executive Officer of GreeneStone Healthcare Corporation, commented, "The Company expected these operational results for the fiscal year 2012, and we anticipate even stronger growth in 2013 where we have all the reasons to believe that by the end of our second quarter the Company will be profitable."

The 'buy and build' growth strategy will lead to expansion in their current addiction treatment capacity to 184 beds from 36 beds through strategic acquisitions and internal growth.

Final Note

Healthcare in Canada is delivered through a publicly funded system that covers all "medically necessary" hospital and physician care, as well as prescription drugs for seniors, and curbs the role of private medicine.

While the system has widespread public and political support, costs have soared well above the rate of inflation and are expected to climb further as the baby-boom generation ages.

It is often stated that Canadian healthcare costs much less than American healthcare. This is of course a myth. Canadian costs are set per procedure. Hidden healthcare costs are high in Canada because of excessive wait times. The costs of under or non-performance at work due to these longer wait times are huge costs on employers and the economy, not to mention the individual patients who are laid up. These are the hidden factors that hide the massive cost of universal healthcare in Canada.

Changes are needed include more treatment of patients outside of hospitals - GreeneStone's medical clinics are a great opportunity to play the healthcare field in Canada.

From a valuation point of view, Healthcare provides the most upside potential. GreeneStone currently trades at an implied per bed valuation of $160,000, a discount of 68% to the very conservative rate for facilities acquisitions of ~$500,000. The current valuation of $0.21 looks absurd and I think with the coming expansion plans the stock price could see a nice short term rebound to levels above $1.00. Current analysts target prices are around $5.

Private investors can still jump on the bandwagon before private equity steps in.

Disclosure: I am long GRST.OB.

In my first article first article about Majesco Entertainment (COOL) I was thrilled about motion-controlled games. The greatness of motion controlled gaming is that it is immersive, entertaining and, above all else, fun. Personally I am still waiting for a great sword game where you can fight as a real knight with a sword in your hands. Majesco is the right company to bring this game to millions of wannabe knights.

Majesco's Q3 results were quite disappointing, so I sold my shares with a 12 cent loss and will wait for a better entry point. The poor results are blamed on seasonality and "challenging retail conditions for interactive entertainment." Wii game sales (61% of total) fell 60% year-over-year to $5.5 million. Majesco now expects FQ4 results to be "in the lower end" of a revenue guidance range of $130 million - $140 million and an EPS range of $0.20-$0.30.

Personally I found those excuses weak, maybe because I am not familiar with the gaming business. A brilliant investor would say "invest in what you know". I knew the financials and I thought I could predict the future, but I guess I was wrong this time.

I already mentioned in my former article that the company is depending too much on their Zumba Fitness franchise. Sales of Zumba products accounted for approximately 79% of Majesco's sales during the 9-month period compared with 70% a year ago. Depending on such small number of "hit" titles attracts competitors that could develop something similar or better and take away sales or reduce the ability to get a premium price.

If their latest releases NBA Baller Beats and Mini Putt Park can turn the coin the coming quarters the stock price could run to levels of $1.75 again, but for now I am looking for a new entrance at $1. The technical picture looks very weak, so we will see what happens the coming months.

Composite Indicators	Signal
TrendSpotter			Sell
Short Term Indicators
7 Day Average Directional Indicator			Sell
10 - 8 Day Moving Average Hilo Channel			Sell
20 Day Moving Average vs Price			Sell
20 - 50 Day MACD Oscillator			Sell
20 Day Bollinger Bands			Sell
Short Term Indicators Average: 100% Sell
20-Day Average Volume - 258,771
Medium Term Indicators
40 Day Commodity Channel Index			Sell
50 Day Moving Average vs Price			Sell
20 - 100 Day MACD Oscillator			Sell
50 Day Parabolic Time/Price			Sell
Medium Term Indicators Average: 100% Sell
50-Day Average Volume - 201,320
Long Term Indicators
60 Day Commodity Channel Index			Sell
100 Day Moving Average vs Price			Sell
50 - 100 Day MACD Oscillator			Sell
Long Term Indicators Average: 100% Sell
100-Day Average Volume - 274,314
Overall Average: 100% Sell
Price Support Pivot Point Resistance 1.36 1.46 1.56 1.66

Detailed Opinion as of Monday, Sep 17th, 2012

Source: www.barchart.com

Final Note

Last week, NBA Baller Beats was launched as the first-ever full body motion-based NBA licensed video game that lets you perform like a pro using a real basketball. At Amazon it received already some good reviews. I think this game could become a "hit" title too, just like their Zumba Fitness franchise.

The holiday period will be crucial for the company's future, especially because Nintendo's "Wii U" will hit US store shelves on November 18 and aims to lure gamers back from the internet and mobile devices.

The Wii U will allow users to make personal TV and video programming lists and record shows through TiVo and other digital recording services.

For Nintendo, known for its game-centric approach, adding an entertainment component is a positive step, said Billy Pidgeon, an analyst at M2 Research. "It's a must-have right now and with this, they can catch up somewhat to Microsoft's Xbox offerings."

The Wii U is the first console machine to be sold by a major gaming industry company in more than six years. With a new Microsoft Xbox and updated Sony Playstation expected in 2013, sales will offer clues as to whether more advanced, next-generation game hardware can boost the ailing video game console and packaged games market.

The Wii has been a bonanza for Nintendo (NTDOY.PK), with 100 million sold, but demand is waning. In the three months to June 30, Wii sales more than halved to 710,000 from 1.56 million a year earlier.

For Majesco Entertainment the last quarter of 2012 and the year 2013 are important because it could lead to unexpected high growth numbers if gaming fans start to embrace the video game console market again.

The company's current line-up of interesting new games such as NBA Baller Beats could bring renewed interest in the stock again. If sales succeed expectations investors are going to jump on the bandwagon again.

Disclosure: I 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.

I was amused reading Henry Blodget's article on Business Insider stating that no one actually reads Facebook's IPO prospectus or Mark Zuckerberg's letter to shareholders. I read the IPO but I don't think many other investors did. Why? Because it wasn't necessary.

Everyone knows that Facebook (FB) was way overvalued. Despite that many investors believed the stock would arise to levels not seen since the Dot.com boom, so investors could make a decent amount of profit. However, not all of them. The absence of many private investors was one of the reasons why Facebook's IPO was a complete failure.

Many institutional investors are now loaded with stocks which are not attractive at all. In the Netherlands retirement funds lost millions of dollars on Facebook. In that sense Henry is right, many Chief Investment Officers didn't read the prospectus and were lured to take part of the biggest internet IPO ever.

Wall Street's Facebook IPO hype machine did a great job, but investment bankers forgot to read page 73-76 of Mark Zuckerberg's letter.

Some highlights:

Facebook was not originally created to be a company. It was built to accomplish a social mission - to make the world more open and connected.

So making a profit doesn't seem so important!

There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future. The scale of the technology and infrastructure that must be built is unprecedented, and we believe this is the most important problem we can focus on.

So costs will increase!

Even if our mission sounds big, it starts small - with the relationship between two people.

Indeed, a relationship. But not the relationship investors had hoped for!

We have already helped more than 800 million people map out more than 100 billion connections so far, and our goal is to help this rewiring accelerate.

Connecting doesn't necessarily mean making profit!

One result of making it easier to find better products is that businesses will be rewarded for building better products - ones that are personalized and designed around people. We have found that products that are "social by design" tend to be more engaging than their traditional counterparts, and we look forward to seeing more of the world's products move in this direction.

Let's see! Hopefully businesses don't run away.

Our developer platform has already enabled hundreds of thousands of businesses to build higher-quality and more social products. We have seen disruptive new approaches in industries like games, music and news, and we expect to see similar disruption in more industries by new approaches that are social by design.

Social by design, but what's in it for me as an investor!

A fantastic letter but not well read by many professionals.

Some background information

Facebook is the worldwide leader of "social media". Although not the 'first in place', Facebook quickly took market share from other competitors such as Myspace to became a gorilla in the Internet space in less than 10 years with currently near 1 billion active users worldwide.

The company was IPOed mid May with a market value of over $100 billion and with an absurd valuation of around 100x past 12 months earnings.

Fundamentals should start to take over and Facebook will need to prove to investors that it can be able to

One: keep the lead in the social media network over time and

Two: monetize its incredible active users base of nearly 1 billion individuals and companies to justify a high valuation level.

Final Note

Today's business model is based on a free subscription for users, the company capitalizes on selling advertisement for companies through its subscriptions base, and individuals can go to the companies Facebook page or just click on banner ads. Because Facebook has a significant amount of information (details) about individuals, the ads can be very sharp in terms of targeting.

Another part of the business, which represents about 17% of total sales today but hopefully will increase, comes from "online games'. Facebook subscribers can play through Facebook platform online games developed by third parties, such as Zynga (ZNGA). As users buy features for these games through Facebook credits and Facebook will take a fee on these purchases, such as a broker, and will give away the other part for the game developer.

Facebook will need to develop other sources of revenues in the future, such as a premium subscriber offer in order to provide paying services for the communities (a larger photo and video space, special features…).

To justify a P/E above 35 for 2012, it needs growth: internal and external. I don't see it happening this year and suggest to wait buying shares until the shares dip around ten dollars.

Valuations / Ratios

Disclosure: I 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.