Description

This is a quick idea/trade. Wan wrote this idea up much longer and better than I will. RGX is one of the leading imaging companies in the United States. A market that is still growing due to the aging of the US popilation and desire for increased healthcare.

The company badly missed earnings due to a combination of too much physician vacation days taken in July and August. However, one of the reasons this company has traded at $3 before is that management has a history of dropping earnings bombs on the markets. This time was no different. The company also saw some erosian in revenue as a few markets went from a capitated rate to a fee for service rate - which is usually more profitable for companies like RGX. However, a new referal system made it harder for patients to get scans and thus cut revenue in those markets. That said, the market has taken the stock from 14 to 4 in a matter of weeks, which seems excessive given that the company is still generating free cash flow and is growing. Another reason the stock has been hit hard is false rumors of massive physician defection. The company denies these rumors and one source also sites little evidence of defections.

Alliance, its competitor, which is owned by KKR, trades at over 20x earnings. RGX maintains that volume is back to pre July levels and that cost cutting and sales force management training should drive volume and profits in the capitated markets.

The bottom line. The company cut guidance from .87 to .75 which is a big miss but the valuation more than makes up for the uncertainty:

Equity Cap: 88
Cash: 18.4
Debt: 175.0
EV: 245
EBITDA: 73.5
EPS:0.75
EV/EBITDA:3.3
P/E:5.46

Alliance Imaging Trades at 6.5x EBITDA and 20x Earnings according to Bloomberg. 15x Forward Earnings.

At 15x earings, RGX is an $11 stock.

Catalyst

Way oversold stock. A couple of clean quarters and debt pay down. Could be bought be Alliance. Takeover multiples have been around 5-6.5x EBITDA. At 5x EBITDA, the company would fetch $9.8 per share.