Description

The Joint is the largest single chiropractic care provider in the US, with 546 total clinics spread across 33 states. It performed  7.7 million treatments on patients in 2019 who paid, on average, $29 per treatment vs. the industry average of $77 per treatment. The business model creates an affordable and uniform delivery of chiropractic care by removing insurance from the equation. While COVID initially caused a slowdown in business, The Joint was deemed essential, and currently, 99% of locations are open. New patients are converting at a higher percentage to subscription/bulk packages than ever before(50% vs. 40%), and a new franchisee that opened in Texas during June '20 had the best two-month initial sales in the history of the company. We believe The Joint's share price will compound at least 20% annually over the next 4.5 years and has the potential for even higher returns as clinic growth continues over the next decade.

Business Overview

The Joint was previously written up in 2018 by pat110, and I would refer you to that write-up for a more detailed background of the company. For a quick overview, The Joint offers a standardized and affordable chiropractic care level unmatched in the industry. It has grown total clinics from 246 at the IPO(2014) to 546 as of July '20. We believe that CEO Peter Holt has done a great job turning around the company since taking over in Mid-2016 and has the company well-positioned to take share in a highly fragmented market.  

The Joint produced same-store sales(SSS) of 25% for FYE 2019, and coming out of 1Q20 at the beginning of the COVID lockdowns, SSS grew 15% yoy, before falling 6% during 2Q20. However, SSS has returned to growth, and during July, the company experienced 10.2% yoy growth. Based on our research, we believe that the return to growth has not only continued, but we estimate it accelerated back to mid-teens during 3Q20.  We believe that this sustained growth is a direct result of two things: first, a simple, affordable, and effective treatment option for existing chiropractic patients. And second, from roughly half of the population not knowing what chiropractic care means, and the sizeable portion that knows what it means but is afraid of the treatment. By offering straightforward messaging and consistent yet effective treatment, The Joint has attracted a high percentage of patients who have never been to a chiropractor before, with 26% of new patients or ~152k total patients in 2019 being new to chiropractic.

New stores are also ramping faster than the historical average. New clinics are breaking even just under six months, and the payback period for franchisees has decreased to ~3.5 years on average. We believe this creates an attractive investment opportunity for potential new franchisees and for existing operators to expand their holdings. Using recent disclosures around clinic performance and sales ramp, we estimate that a franchisee can earn an IRR of 31% over a ten-year period. We believe this attractive return and ability to attract new to chiropractic patients support management's mid and long-term goals of 1,000 and 1,800 total clinics, respectively.

Franchise vs. Corporate Update

While most clinics are and will be franchise locations, management has noted that the percent of total corporate-owned or managed clinics will fall between 10-15%, with the mix at 7/30/20 sitting at 11.5%. While building out its corporate clinic portfolio, we expect a near-term drag on margins and earnings as The Joint must incur the start-up costs and the initial ramp in sales. However, as the corporate units continue to be built out, we anticipate meaningful leverage on overhead as The Joint uses a "cluster" approach when deciding new locations. Clustering allows for an efficient sharing of resources, better per-unit ad spend, and quicker ramp periods than if they were to open a clinic in a location absent an existing clinic.

As of 6/30/20, there were 209 franchise clinics in the pipeline, of which 11 licenses were sold during the quarter. While total additions were lower than average, the fact that The Joint was able to sell any licenses in the midst of a global pandemic speaks to the model's resiliency. We believe these will convert to operating clinics at a high percentage as ~80% of clinics in the pipeline have converted over the subsequent 24 months since 2015 on a rolling basis. Furthermore,we believe additions to the pipeline will return to pre-covid numbers as we have seen with 14 sold in July ’20 alone, setting up a visible path to 1,000 total units. While management is targeting 1,000 total clinics by the end of 2023, we believe it is more likely to hit that goal by 2024.  

Competition

The Joint's primary competition comes from the 40,000 plus independent chiropractic offices; however, the two offer different services. The Joint does not take insurance and focuses more on therapeutic treatments vs. clinical diagnosis and treatment. When speaking to a traditional chiropractor who ran a 30 clinic business, he noted, " you are more likely to go to a traditional chiropractor than The Joint for a major injury due to insurance and additional equipment that will be needed, but for standard non-major injuries/adjustments The Joint offers great treatment." When looking at the other franchisors, the closest from a unit count is HealthSource Chiropractic; however, they have reduced their total clinic count by 123 since 2017.

Valuation

We estimate that revenue will grow 22% annually through 2024, resulting in $1.56 in EPS for FYE2024. Using a 26x P/E multiple, we arrive at a target price of $40.52. This incremental revenue should convert to earnings at a high rate as the company starts to leverage its large SG&A. We believe that the bulk of the spend has already occurred at the parent company level to support the franchise and corporate growth as management hired to manage 1,000 plus units vs. the 546 currently in operation.

Additionally, the company has started to sell more franchise licenses directly vs. through regional developers, which will result in better economics from the franchise locations. Currently, regional developers receive 3% of the 7% franchise fee charge on revenue. While we believe it is likely that The Joint will make progress here in the long term, we anticipate that most franchise clinics will continue to be supported/sold by regional developers. One area that we feel could drive EPS higher is the addition of ancillary products in the clinics. These products, such as creams, orthotics, etc., come with a very high margin, and even with a low attach rate would have a meaningful impact due to the high patient throughput, although we currently are not modeling this in.

Risks

·         Increased competition

·         Reduction in the cost of traditional chiropractic care

·         Pipeline of undeveloped locations does not convert to operational clinics

·         Over developing Corporate Locations

Catalyst

·         Attraction of new to chiropractic patients

·         Continued clinic build-out

·         Improved ramp and payback period on new clinics