Description

Dialysis Corp of America-- DCAI ($3.69)

Description:
This is a simple business. DCAI owns and operates 12 dialysis centers in three states. The company also has a 40% minority interest in another dialysis center. The company treats its patients at its centers, as well as in nearby hospitals through contracts with those hospitals. It is growing primarily through the opening of new centers, though acquiring centers is also considered. Currently, two new centers are under construction (both scheduled to open late in 2002 or early 2003). The company has approximately 650 patients (as of 6/30/02) and each patient comes for dialysis three times a week for three hours each visit.

DCAI doesn’t disclose the number of centers it expects to open beyond the two currently planned, but it has said it plans on “aggressive” growth and it’s history of the last few years is one in which it has grown its centers, patients under care, and revenues rapidly. (At the end of 1999, DCAI had 6 centers and about 170 patients).

This is really a GARP story, but the “reasonable price” is very reasonable. The stock is cheap on many measures. Firstly, it is trading at about half of what it would sell for on the private market. Recent transactions go for about $50,000 per patient (for mature centers). Based on this, DCAI’s 650 patients are worth about $32.5M. There is about $1.5M in net debt. Thus the private market valuation of roughly $31M. With 4.4M s/o, you get a value of $7.05. Keep in mind, this is using the patient count as of 9/30/01. I am estimating at least 750 patients by early 2003 which would put the private market value at over $8.

On a P/E basis, I am expecting $0.09 for the September Q, which puts the stock at 10.2x run-rate earnings with top line growth over 50%. Assuming the $0.09 for 3Q02, DCAI will have $0.25 for TTM, which puts the stock at less than 15X TTM eps. I have modeled $0.30 for ’02 and $0.44 for ‘03. DCAI will not grow eps sequentially every quarter as eps is negatively impacted as opening expenses for new centers coupled with low utilization rates in the first six- nine months of operation of the new centers, penalizes earnings in the short-term.

EV/EBITDA is 4.2x, using TEV of $18.0M and run-rate EBITDA of $4.3M. This looks cheap in and of itself, but is especially cheap when you consider the following: first, it is a healthcare company with very little inherent risk to its business model (while there is regulatory & reimbursement risk, there is very little economic risk as these patients must come for treatment regardless of how the economy is). Second, comparables, such as RCI and DVA, trade at 7.5-8.0x EBITDA. While these companies are much bigger, they are growing their revenues at much slower rates (roughly 10-20%) than DCAI.


Risks/negatives:
a) unexpected change in reimbursement rates (DCAI is dependent for about 55-60% of its revenues from medicare & medicaid reimbursement). Reimbursement rates have actually been trending up lately, but this could change.
b) large shareholder which own 2/3rds of the stock with uncertain plans for said stock
c) microcap with limited float
d) there have been some intercompany transactions (loans) with MDKI, which owns two-thirds of the stock

Catalyst

Catalyst
*while there is no specific corporate event that will attract attention (other than perhaps moving from the small cap to the national market system, as is hoped), the combination of very very strong growth and compelling valuation will be hard to ignore especially with the growing consistency to and magnitude of its profits.
*should stand out as a company whose profits should be unimpacted by the current uncertain economy.