MDF – OSFOY for RMIWA
When I first received the message for OSFOY I decided I would pick MDF (then ~$2.7), and subsequently the stock value has increased a nice amount. Admittedly I have been a shareholder of MDF (formerly MDPA) since the fall of 2003 at a share price of approximately 0.50. Since that time MDF management has led the company out of a very poor financial condition due to a failed pharmacy, improved profitability of the core PSN business with Humana, and launched an HMO to diversify the MDF cash flow and dependence on the Humana contract. I firmly believe that 2007 is the pivotal year for the MDF HMO and if breakeven is reached, I predict a share price of $4 - $5/share, representing an increase of ~40% from the current share price. Clearly at this junction MDF is not a ten-bagger candidate, however, based upon the performance over the last 3 years I have a high confidence in the potential of this stock. Below is the financial performance over the last two years (I originally had this in a table, but I don't know how to translate it into Ihub).
Calendar Year Revenue Earnings Notes
e2007 (see below) $250M .24
e2006 $230M .11 Assume the fourth quarter is comparable to the third
Q ending 9/30/06 $60.8M .05 $2.6M loss from HMO operations alone
Q ending 6/30/06 $56.8M .01 $3M loss from HMO operations alone, 3500 HMO members
Q ending 3/31/06 $54.8M .00 ($250K)
2005 $183.7M .05 HMO Launched in July05
2004 $158M .38 Deferred tax asset and benefit from taxes ~.30
2003 $143.8M .10
Positives:
Increase in number of counties for HMO
HMO open season began on 11/15/06
Ability to increase MER
Large amount of increasing cash reserves
Low penetration in counties where HMO is being marketed
Risks:
Potential to lose Humana contract and majority of current revenue and profits
Need to manage MER and improve efficiency with increasing HMO size
Typical risks with profitably managing an HMO
Estimate for 2007:
Assumptions:
The HMO reaches break-even by the end of March 2007
Relatively mild 2007 flu season
Since the first and second quarters are the least profitable, assume .03 per quarter
For the third and fourth quarters, an additional $2M should fall to the bottom line (80% of current HMO losses to be conservative) adding .04 resulting in .09 per quarter in net income.
MDF valuation at the end of 2007:
I recognize this is not a traditional valuation, and may not be valid but my estimate entering 2008 would be as follows:
PSN valuation of ~$3.2 using .08 cents/share/qtr for PSN net income (removed a penny a quarter average to reflect the less profitable flu season) and a PE of ~10
In one of the conference calls, Early indicated that a common valuation for an HMO is $10K per HMO member. Assuming 7,000 members by the end of 2007, that would add another $70M in value or $1.25/shr (assuming 55M shares)
