Upfront disclosure: I am long INFU. INFU is a thinly traded microcap most suitable for investors with a long time horizon and limit orders. This article is intended only for informational purposes; please do your own research.
A few months ago, I published an article discussing Infusystems (INFU). At the time, the chairman had offered to take the company private for $1.85 to $2.00 per share. The board rejected the offer as undervaluing the company, and I thought the chair was likely to come back with a higher offer. At the time, shares were trading in the mid-$1.70s, so it looked like a pretty interesting risk / reward.
A lot has happened since that article was released. The original go-private offer fell through, and shares cratered to $1.30 in response. But something interesting has happened since they hit that low- shares have rebounded all the way to $1.90, below the low point of the chairman's offer and well above where they were trading when the offer was on the table.
Obviously, a lot has happened in the interim. But the crux of my first article discussing INFU was the chairman would not make a bid for the company unless he thought the intrinsic value of the company was substantially higher than that bid. This article will review what's been going on with INFU the past few months and provide some updated information that continues to point to an intrinsic value substantially higher than today's prices.
The big news since the offer fell through was INFU successfully recieved offers in each of the 9 MSAs CMS had put up for recompete. Remember: investors are terrified of recompetes. The fact INFU was successful in each market speaks strongly to both 1) their competitive advantage in their niche over smaller rivals and 2) that the recompetes will not kill them. That INFU was also able to reaffirm high single digit revenue growth for next year and that only 1% of their revenue would be affected by the initial round of recompetes were added bonuses.
The company followed up their successful bid by announcing solid 3Q results, with revenue up 11% and adjusted EBITDA up almost 20% in addition to reaffirming their revenue guidance. They also posted a very insightful investor presentation that dug into their business and highlighted some opportunities for it.
Which brings us to today. With the stock trading at $1.90 and $27m in net debt, the company is trading for just under $60m EV. I think their are several indications that this price remains substantially undervalued.
First, it's in the mid-range of the chairman's initial bid. Remember, the initial bid came before the company knew whether or not it would be successful in getting offers from the recompetes. The chairman was willing to accept that risk and still thought intrinsic value sat above today's price.
Second, the stock is still cheap. After adjusting for some one-time items, EBITDA for the past twelve months comes in at $14m, which would put EV / EBITDA at just under 4.3x. Given the business has a bit of operating leverage to it, we'll likely see EBITDA grow in the low single digits next year, which would put forward EBITDA at ~$15.5m and forward EV / EBITDA 3.9x.
And that growing EBITDA presents the company w/ a significant opportunity. INFU currently has $24.7m in term loans outstanding that they're paying 9.5% annually on. In today's market, no one pays 9.5% for a term loan that's <2.0x levered. If the company could refinance it to a more reasonable 4.5-5.0%, that would result in savings of over $1.0m per year.... not small stuff for a company with a market cap of $40m!
Finally, transaction multiples are starting to come in that support a significantly higher equity value. CVS purchased Coram Infusion for $2.1B earlier this week. The transaction is an interesting data point for a lot of reasons. Coram is one of the largest players in the home infusion market, and INFU obviously competes within a niche in that market. Coram is experiencing similar high single digits revenue growth, and (according to their SEC filings) they are going through the same CMS recompete process that will result in a similar 1% revenue hit next year but with the possibility for a larger hit long term.
Given the similarities, the multiple CVS is paying is very instructive. In the press release announcing the deal, CVS forecasted Coram forward revenues at $1.4B, implying an EV / forward revenue of 1.5x. Assuming INFU grows at the high single digits they've been forecasting, revenue for next year should come in >$65m. Applying the same multiple for INFU would yield an EV just shy of $100m. Subtract $27m in net debt and that leaves $73m in value for the equity, or ~$3.25 per share.
The story looks even more promising on an earnings basis. EBITDA margins are between 10-11% at Coram, which puts forward EV / EBITDA for the deal at 14-15x. EBITDA margins at INFU are 25%, and applying the 15x multiple to the $15.5m forward EBITDA we estimated earlier would lead to a value of $232m, or an equity value >$9.00 per share.
Is that a reasonable valuation? Absolutely- while a $9.00+ valuation is probably too optimistic, a $3-4 share price is certainly reasonable, especially in a competitive bidding scenario. While data is obviously limited, it seems likely that a larger bidder would be able to acquire Infusystem and realize significant synergies through both cross selling and folding a large piece of Infusystem's overhead into their own, and in a competitive bidding scenario they would be willing to pay for a large piece of those synergies.
In sum, despite the recent share price run up, there's a lot to like with INFU. Despite strong continued growth, the company trades at an extremely cheap multiple. Recent deal prices and management's bid both support an intrinsic value materially higher than today's share price, and a potential loan refinancing could result in a huge increase in free cash flow and serve as a strong catalyst for the company.
Repeated disclosure: I am long INFU. INFU is a thinly traded microcap most suitable for investors with a long time horizon and limit orders. This article is intended only for informational purposes; please do your own research.
Disclosure: I am long INFU. 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. (More...)
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