National Research Corp.: Quality/Low Risk On Sale
Summary
- NRC is a small healthcare research and analytics company with a history of measured, profitable growth.
- However, the share price has not had the same upward trajectory as growth slowly wanes.
- Any meaningful growth catalyst may offer significant upside, with the underlying business offering safety.
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Leading Healthcare Insights Leading to Textbook Financial Performance
National Research Corporation (NASDAQ:NRC), or NRC Health, is a company that offers research and insights into customer relationships in the healthcare industry. The company believes that refreshing, humanizing, and improving the healthcare environment will increase patient health while reducing overall expenses. The company has been around for at least three decades and is experienced in providing CR and other healthcare industry insights. NRC's main priority remains focused on making sure healthcare consumers feel a more personal and human touch, as internal surveys highlight the need to improve "Human Understanding."
The company provides a range of services, whether it is reports, analytics, personalized insights, and even performance management tools to clients. However, the company is small and out of the limelight, so insights into the quality of their services are not common in the public domain. Although, they are large enough to have consistent, yearly editions of NRC Health Excellence Awards, and I am sure there is a demand for their services if this is the case. If you have a KLAS account, there is a wide range of reviews of NRC if you want further customer insights. I do not have an account, so I will determine if the financials are those of a solid company.
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Financials
NRC derives their revenues from long-term agreements, a mix between sales of solutions and subscriptions to the service. The incorporation of new clients, platform improvements, and occasional acquisitions have been the drivers of growth over the past 20+ years. This is reflected in the incredibly stable revenue growth seen in the chart below. Yes, the company has had positive revenue growth for at least 16 years straight, including through the financial crisis and COVID-19 pandemic. However, the overall rate has slowed of late, but the lack of deceleration is incredible. Diving into the data, we can see that YoY revenue growth is 11.9%, while 3Y, 5Y, and 10Y CAGRs are between 6.2% and 7.9%. For a sense of scale, revenues increased from $86.4 million in 2012 to over $150.9 million for the past twelve months.
Koyfin Annual Report
The company's stability is reflected in earnings as well. Both EBITDA and Net Income offer a similar upward growth trajectory to the revenues. In fact, margins have been improving at a faster rate than revenues, leading to fairly rapid earnings growth over the past 10 years. Both Net Income and Diluted EPS are increasing at 11.9% over the past 10 years, and the current EBITDA and Net Income Margins are at 33.9% and 22.2%, respectively.
Profitability is reaching high levels, and one wonders how much higher it can get. Thankfully, plenty of cash is generated to drive growth, all thanks to this strong profitability (take notes, growth companies). Occasionally, moments of volatility in the margins may offer entry points as investors feel the pattern of success is coming to an end. However, each time profitability stumbles slightly, NRC brings it back within a quarter or two. Let us look at the balance sheet to see how the rest of the foundation is faring.
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Looking at the important balance sheet metrics continues to highlight safety and conservative management. While there are occasional debt raises, the company instantly begins to pay these debts off. At the moment, the company is currently at a low-end leverage ratio as significant amounts of cash have been accumulated over the past few years. In fact, total cash is now at over 5% of the total company market cap, $841 million. Considering the falling leverage and rising cash, the company may be looking to perform some form of investment over the next few quarters.
Along with the strong balance sheet and quarterly cash flows, the company offers a dividend, which is currently at a 2.15% yield and 36% cash dividend payout ratio. However, dividend growth is not reflected historically, as the initial dividend yield was more of a special occurrence since 2015 (with an astounding 30% yield in that year). As the dividend has fallen since then but is turning around now in 2022, I expect more managed dividend growth into the future.
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Valuation
While performance continues to awe, the market does not seem to agree. The current valuation is now close to 10-year lows, at a 22x P/E and 5.5x P/S. Whether this is due to market factors or perceived company weakness, I do not know. All I can rely on at the moment is the historic and current performance, and financial foundation, all of which offer positive indications.
As is often recommended, it is better to buy during periods of weakness or uncertainty, and wait a few quarters or years until the outlook improves. As I personally believe market issues beyond NRC's control are the major influence at the moment, it is a perfect time to begin accumulating. Although, I will always continue to recommend recurring investments to reduce volatility risk, especially as the shares are in a sharp downtrend.
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Conclusion
It is important to not just look at NRC's stable financials. While the healthcare industry seems ready to rebound after the pandemic, with increased spending beyond COVID expenses, it is unknown how the industry will play out over the next few quarters. Also, internal risks including the significant controlling interest by the longtime CEO Hayes has been an issue in the past. However, with his controlling shares now mostly moved to trusts, I find that controlling issues are a weak bearish point, especially after 10 years of debate but no impact.
I believe that NRC offers a strong, safe, dividend growth investment for investors to consider. While it will be important to watch growth moving forward, I believe the current cash on hand, low leverage, and profitability all create an environment prime for favorable shareholder practices, whether buybacks, increasing dividends, or acquisitions to drive growth. While past performance is no direct indicator of the future, there is very little data to support a weak business. Therefore, I find NRC to be a buy, and am considering the company for a safety-oriented portfolio.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in NRC over 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.