Description

Precis Inc. (PCIS) is a company with an EV/FCF at 5.85x ( ttm FCF = earnings + depr - cap ex) or 5.1x (ttm FCF = cash from ops - cap ex). It has no debt and cash on hand of 84 cents/share versus a share price of $3.75. EV/ ttm EBITDA is 3.78x.

PCIS is a provider of healthcare and other membership service programs in the United States. And yes, it utilizes multi level marketing (commissions and overrides on healthcare services total 55% for the second month of membership forward). But it has a unique healthcare product for the uninsured or self-insured marketed under the Care Entree name, has started an in house sales force, and is looking at growth opportunities with self insured organizations and employers. With over 40MM people lacking health insurance, and 75MM at least briefly lacking any coverage in a recent two year period, there is a substantial market for their main product.

For a monthly membership fee ranging from $9.95 (for prescriptions) to $69.95 (for a total medical cost savings plan) per family, Care Entree plugs the user into its PPO network (just like insured patients) and provides the same kinds of fee discounts (15-50%) for medical services an insured patient receives. Coupled with the ability to sell high deductible (catastrophic) health policies through those sales affiliates licensed for insurance sales, PCIS has a complete solution for those without health insurance through more traditional sources.

At the end of 2002, in response to the needs of the medical providers, PCIS instituted required cash escrow accounts for its healthcare members. These funds provide pre-certification of ability to pay for these uninsured patients, and assure medical providers of immediate payment direct from the escrow account. Thus PCIS’ product benefits the medical community (assured and immediate payment without claim forms) as well as the patient/member (discounted medical fees).

In September 2003, PCIS expanded the offerings of its Care Financial subsidiary from just high deductible and scheduled benefit insurance policies, to add a suite of products including life insurance from Lion’s Share (Allianz), Healthcare Reimbursement Arrangements (HRAs) and medical and dependent care Flexible Spending Accounts (FSAs). The high deductible and scheduled benefit insurance policies and HRAs and medical and dependent care FSAs, when combined with the Care Entrée program, offer affordable well-rounded solutions for individuals and companies who are no longer able to afford or obtain traditional health insurance policies. Thus PCIS is now in a position to market not only to individuals, but to employers and organizations needing a suite of individual benefits in lieu of more traditional (and expensive) insurance plans.

PCIS also operates several other membership based marketing programs for ‘rent to own’ clients, banking and consumer finance clients, and other organizations. Precis originated as a ‘smart card’ producer, providing cards with chip stored data that can be ‘read’ as needed, or accessed via a phone call to a customer service center. Precis uses this technology in support of its acquired membership businesses. While there is no disclosure of the mix of revenues in present reports, a CNN Money report from June of 2002 indicated 67% of revenues then were related to the healthcare business. The emphasis going forward clearly is directed at the healthcare business.

Earnings in the most recent quarter ended 9/30 declined to .08/share vs .13/share in the year earlier period as revenues declined to 10.268MM from the year earlier 11.446MM. The decline was in reaction to the escrow account requirements, and other membership declines. In addition, additional expenses related to providing the necessary customer/client support going forward have ramped up.

There has been a delay in revenue flow from new business already signed with the State of Louisiana Office of Group Benefits, to provide medical care discounts to beneficiaries who either live or travel out-of-state and therefore do not have access to a network of providers. The in house sales force “approach has lagged in certain areas, in particular in the sales execution of previously signed private label agreements.”

These are near term execution difficulties that are being addressed. “[Precis] will be focusing our sales strategy to achieve the right blend of sales attainment and account management skills”. Technical issues in getting claims transmitted with the Louisiana contract have been resolved.

Precis has evidence of the customer acceptance of the cash escrow requirement in the growth of its escrow balance as follows: 0.109MM 12/31/02, 0.521MM 3/31/03, 1.346MM 6/30/03, 2.000MM 9/30/03. While the latest Q lists average membership as 8-10 months, it seems possible to me that the requirement of an escrow commitment, and prevailing double digit health insurance price hikes might result in longer retentions going forward. Certainly the escrow accounts (and thus the demonstrated ability to pay) make the plan’s relations with medical service providers more attractive. Precis has also signed an extended agreement through May 2005 with PHCS, it’s largest PPO network medical provider.

The large self-insured employer group and medical benefits market is a vast and relatively untapped market for Precis’ healthcare product offering. The service agreement with Louisiana, and an agreement signed this summer with Fleet Medical Resources, to provide access to re-priced rates for hospitalization and other medical services to thousands of cruise line employees, are the initial openings for Precis in those markets. Precis is in early stage development of similar programs with other public and governmental entities.

Precis is priced to reflect its near term difficulties, and provides an excellent investment opportunity in an earnings growth and revenue diversification story in a huge business market going forward. Precis has taken the lead in developing a unique healthcare solution for the uninsured that also is attractive for the medical service provider. Precis is equipped now to handle larger volumes of business. Precis is penetrating new markets utilizing the infrastructure developed for its existing healthcare business.

A recent VIC writeup of a competitor for the other PCIS membership programs, Memberworks (MBRS), generated considerable interest with 27 users submitting a rating (averaging 4.1). PCIS 1) is offering a superior ‘membership’ based product in healthcare as the dominant part of its business, 2) has not experienced any similar legal challenges to its operations as those faced by MBRS, and 3) yet is valued at 2/3 the FCF multiple of MBRS as calculated by Roark in subsequent discussion. Other statistical comparisons are trailing PE at 21 for MBRS vs 9.6 for PCIS; EV/EBITDA for MBRS at 9.1 vs 3.8 for PCIS. MBRS is about 7.5 times larger on an EV basis.

The only other public comp is CD, which is a conglomerate I wrote up late in 2001. Membership business is a small part of its diversified operation.

All discounted healthcare competitors listed in the 10K are private. None offered a plan requiring an escrow account and/or catastrophic health insurance.

If you think the focus on discounted healthcare is a good niche (I do given the market potential), then it seems growth and valuation for PCIS could both rise. While I can see the escrow accounts having had a near term deterrent effect on enrollment, I also see them as taking the industry to another level, and building more of a customer relationship. If staight health insurance is becoming horrendously expensive (no matter who is paying for it), there may be an increasing role for catastrophic insurance plus discounted patient pay program designs.....like PCIS offers.

Catalyst

Catalyst: Renewed growth: 1) as the escrow account requirement meets increasing acceptance by healthcare members; 2) as near term execution difficulties are resolved; 3) as further penetration into the self-insured employer group and medical benefits market occurs. An earnings rebound just to the year ago 50 cent run rate coupled with a modest 12 PE (identical to that on its current .32 run rate) would produce a price of $6.00 for a 60% one year return.