Description

The Joint

The Joint franchises and operates chiropractic clinics.  They have 352 franchised clinics and 47 corporate clinics.  They recently reached an inflection point of being EBITDA positive and have a long runway of growth that creates the potential for equity appreciation of 200% to 350% in the next five years.  They have the potential to grow well beyond that timeframe based on what the company estimates is a full US store base of 1,700 units. 

Some History

The company acquired the predecessor company with 8 franchised clinics in operation in 2010.  The company went public in 2014 with 246 franchised clinics.  The company raised about $17 million at $6.50 per share.  An offering followed in 2015 at $5.50 per share which raised about $13 million. 

At that time the company was lead by John Richards whose background included VP of North America for Four Seasons Resorts, President of North American operations of Starbucks and CEO of Elizabeth Arden Red Door Salons.  He proceeded to almost bankrupt the company in the next three years spending money like a drunken sailor.  In April 2016 the company hired Peter Holt and he was promoted to CEO in August of 2016.  The turnaround since has been stunning.  From an EBITDA loss of $7 million in 2016 the company roughly broke even in 2017 and had EBITDA of $400,000 in the 4^th quarter.  Guidance for 2018 is EBITDA of $2.5 to $3.5 million. 

Holt’s background includes extensive experience with franchise companies.  He was CEO of Tasti-D-Lite from 2013 until the company was purchased by Kahala Brands in 2015.  He held various positions at Mail Boxes from 1997 to 2003 including VP of franchise Sales and ultimately head of all of franchise operations. 

The Model

The Joint offers a different model than traditional Chiropractic Clinics.   Locations in retail strip centers versus medical settings.  No appointments.  Convinenent hours including weekends and evenings.  Average appointment cost of $25 versus $74 industry average.   Recurring revenue model with 76% of sales revenue from monthly memberships.  Focus on acute care only (adjustments).  No MRI’s or X Rays or treatment for severe injury.   Customers are drawn to the ease of service, convenience and price – walk in and get an adjustment most any time for a cost of $25.  An adjustment normally takes 10 to 15 minutes. 

The Market

35 million people in the US used chiropractic services in the last twelve months representing $15 billion in revenue.  Demographic base of The Joint is very broad and balanced.  Highest market penetration index is in adults 25 to 55 (117 to 174).  Slightly skewed female similar to US population.  60% white collar 40% blue collar.  $50K to 100K household income (146), Over indexed include Hispanics and Asian (162 and 126), Bachelor degree and higher (119) and aerobic exercisers (128). 

80% of those surveyed want a non pharmacologic approach to pain management.  The medical industry is being pressured to reduce opiod use and there is a strong correlation in reduced opiod prescription use with those who received chiropractic care (55%).  22% of The Joint patients are new to chiropractic. 

The Joint is the largest Chiropractic clinic system in the country.  The only other operator with more than 100 clinics is HealthSource Chiropractic with 295 clinics.  There are over 39,000 independent Chiropractic offices. 

Franchisee Economics

Average economics include: The initial build out cost is $150K with another $100K needed for working capital.   Most recent clinic openings are breaking even within 9 months.  This is an improvement from 18 months not long ago.  EBITDA moves to slightly positive in year two to, $60,000, $83,000 and $100,000 in years two through five.  So by year five, a franchisee is generating annual 40% cash on cash return.  With same store sales still increasing, it is likely that the average economics continue to get better for franchisees.  The most important component is franchise economics.  The Joint has proven that clinics can and are producing very good returns on investment. 

The company is now growing the number of seasoned regional developers (RD’s) at a high rate.  The number of RD’s has doubled from 8 in 2016 to 16 in December 2017. 

Chiropractors

The Joint provides opportunities for chiropractors to earn starting salaries of $65,000 to $75,000 plus bonus potential.  Industry average starting salaries are in the range of $30,000 to $40,000.  Additionally the chiropractors at The Joint are able to have a higher focus on patients, with less administration and no hassles of dealing with insurance companies. 

Recent Results

The Joint just released 4^th qtr 2017 results last week.  They are very impressive.  For the year system-wide sales grew 29% to $126 million.  The Joint revenue grew 23% to $25 million.  EBITDA loss of $91,000 compared to a loss of $7.6 million in 2016.   Most impressive of all - 20% same store sales growth. 

Valuation

Below is a five year model.  I’m using an EBITDA multiple of 12.5, which I think is a very reasonable private market multiple for a smaller emerging franchisor growing at 20% plus.   Some of the larger public franchise companies are selling at a multiple of 15 to 18 currently with growth in the single digits. 

I took a high level view and extrapolated recent growth rates for the next five years.  I assumed additional revenue growth would convert to EBITDA at a 50% rate, which is the level in the 2018 guidance.  I think that the leverage could get even greater than the 50% rate given the operating leverage of similar successful franchise business models.   The company is basically debt free.  The company should be able to finance the growth in the model with operating cash flow and generate excess cash, so there is no need to raise additional equity or debt. 

The model below produces a stock price of $24.50 in 2022, a 350% gain from the current share price. 

Catalyst

Continued growth with will convert to cash flow at a very high rate.