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Alliance Healthcare (AIQ): Significant Upside

|Includes: Alliance Healthcare Services, Inc. (AIQ-OLD)

Alliance Healthcare's (NASDAQ:AIQ) Q2 earnings were a large relief for me, given the huge decline in the company's stock over the last month or so, for reasons I still can't quite fathom. Perhaps, there was a worry over revenue declines next year given new reimbursement levels in radiation oncology. However, the CFO addressed that concern in the conference call, noting that there would be negligible effect for AIQ from any current proposed reimbursement changes in 2016. Overall, I still believe that strong demand for AIQ's imaging, oncology, and now pain services will continue unabated for years to come, especially given the continued traction in Obamacare. Financially, AIQ generates strong free cash flow and the current price is only around 5X estimated free cash flow, ex growth cap-ex ($20 - $45 million 2015 estimate of FCF). I can easily see AIQ's stock doubling or tripling over the next few years, as current investments begin to add to the top and bottom line, and FCF continues to grow. AIQ remains an excellent acquisition candidate for larger healthcare player, and with M&A activity in this sector hot, I think the probability of an acquisition is high. I do believe AIQ will be acquired in the next 24 months, particularly given the need for a private equity exit out of the name.

Disclosure: I am/we are long AIQ.