The Joint: Wind At Its Back

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About: The Joint Corp. (JYNT)
by: Colin Tedards
Summary

Shares have skyrocketed since my recommendation to buy in May 2016.

Management has executed nearly flawlessly.

Can the shares keep rising?

In a decade-long bull market, scantly covered micro-cap stocks can fly under the radar. That could be true for The Joint Corp. (JYNT), which has seen its share price steadily rise since I recommended buying shares in a May 2016 article entitled Time To Own The Joint.

The Joint Stock Chart Source: Google Finance

The Joint is one of the few micro-cap stocks I've purchased in the last few years, mainly because the business model is sound, the future looks bright, and things appear to be on a reliable path to profits.

But shares have gone from trading below $5 to over $18+ in a short period of time. Before we get into what makes The Joint a compelling micro-cap investment, and if the shares can keep this momentum going - let's go over what The Joint does since it's not a commonly followed stock.

Franchise/Retail Business Model

The Joint is a domestic network of 454 chiropractic clinics located in 30+ states. The company operates a hybrid model where the majority of clinics are franchises but roughly 10% are owned/managed by the company.

The Joint Locations

Source: The Joint Company Slides

Remember, because this is a franchise model, The Joint actually has 2 sets of customers. The customer who's walking in for an adjustment and the franchisee.

The unique selling point to consumers is The Joint operates similar to a gym membership where you can pay a monthly fee and visit the clinics up to 4 times per month. This differs from traditional chiropractic offices which also often require appointments. Additionally, the locations are located in consumer-centered locations like strip malls, rather than medical offices.

The unique selling point to the franchisee include the fact the business model is somewhat asset-light. Locations don't require lots of employees, and don't accept medical insurance; both cut down on overhead expenses other franchise models might require.

In total, opening an average location costs $181,250-$341,050. Impressively, break-even for the franchise owner was reduced in 2018 to just 6 months. In previous years, management projected 12 to 18-month break-even. This is a sign management is doing an extraordinary job improving the launch process.

On the operations side, The Joint is exceeding my expectations as a shareholder. Let's examine where The Joint stands today financially.

Gross Sales

Gross sales isn't your traditional "top line" number because The Joint only collects a portion of these sales as revenue (7% royalty + fees) from the franchise locations. We see the company has steadily increased sales throughout the system of clinics, however, this is somewhat expected given clinics open has steadily increased as well.

The Joint Corp Gross Sales Source: The Joint Company Slides

During Q1 2019, The Joint reported $48.9M in system-wide sales, an impressive 32% improvement over 2018.

Revenue

In terms of revenue the corporation takes in, 2018 was a record year. Corporate-owned clinics and franchise-owned grew revenues at a 32% and 24% clip respectively.

The Joint Revenues Source: The Joint Company Slides

Net income turned positive for the first time in 2018 and the company doubled its unrestricted cash balance in 12 months to $8.7M.

In Q1 2019, the company reported nearly $1M in net income, after essentially breaking even the prior year. The Joint’s model has finally reached critical mass that now allows it to generate positive cash flows.

Overall the company has ample resources to continue the growth of the business model at its current rate without dilution or fundraising.

What's Next?

I don't think it's hard to imagine The Joint is going to keep plugging away at opening locations both under the franchise model and the company owned/managed format.

Guidance for 2019 looks strong with 26%-32% revenue growth and 70+ new clinic openings.

The Joint guidance Source: The Joint Company Slides

The Joint appears to be running on all cylinders, and shareholders have been rewarded with an appreciating stock price. However, it might be difficult to jump in right now and buy (or add) shares considering this is a company with ~30M in revenue and a valuation of $260M+.

The good news is growth is not likely to level out any time soon. The company projects 1,700+ locations are possible. Let's assume the company is extremely optimistic and only can achieve 1,000 locations. At 450+ open locations, The Joint is only halfway to a conservative estimate and nearly 3x away from the company's own projections.

Valuation

I certainly liked The Joint's valuation when it was closer to $3/share or around a $40M market-cap. Now the valuation is closer to $264M+.

In the past, I’d evaluate The Joint’s valuation based on the number of locations in the system.

$264,000,000 Market-Cap / 454 Locations = $581,497 per location.

Recall that The Joint estimates a $181,250-$341,050 typical investment to open a location... so the value of the company's market-cap is exceeding what it would cost to replicate the model from a buildout perspective. In the past, you could have bought shares of The Joint at a valuation less than buildout!

In other words, these are no longer value priced shares. However, The Joint is still an attractive watch list stock for a few reasons:

  • It’s a pure play against rising tariffs

Rising tariffs and supply chain disruptions in China don’t directly impact The Joint. All locations are in the United States, and the company has virtually no exposure to the rest of the world. If the shares are beaten down with the broader markets impacted by China, that would be an appealing entry point.

  • The model just crossed into profitability

The Joint just reported nearly $1M in net income during Q1 2019. This is after several years of loses, the model finally reached a tipping point and is now generating positive cash flows.

With the company guiding to 26%-32% top line growth in 2019, while maintaining a disciplined approach to opening corporate-owned locations (which cost the company more to open than franchise clinics), I believe it’s safe to assume positive cash flows should continue.

  • It’s still early

The company believes it’s opened 1/3 the number of clinics possible. Using the franchise model, The Joint isn’t going to be required to outlay extraordinary amounts of money, or leverage the balance sheet to reach its goals. Combine this with the company’s ability to buy back existing franchise units that are already established, means the company has a steady path to continued success.

Conclusions

For the first time in the company's history, the wind is at its back. Profits, cash, momentum all appear to be in the company's favor. But the share price has hockey-sticked, sucking the value you like to find in a micro-cap investment.

However, an investor with a long-term focus should look to add shares of this company in the event of a pull-back or correction in share price. Even at a $260M valuation, The Joint's opportunity is much greater. That being said, an investor with a long-term focus can also afford to be patient.

Lastly, I believe you can afford to be patient here. The steady nature of the business doesn't lead to upside surprises.

If shares of The Joint begin to trade at a valuation I'd be comfortable with, I promise to do my best to alert you by writing an update on Seeking Alpha or in the comment section below. But until then, JYNT shares are a strong hold for current shareholders, and watchlist material for virtually all long-term investors.

Disclosure: I am/we are long JYNT. 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.