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PFHO’s Q3 2014

Since I went on record last Friday suggesting a 33% gain in six days was likely for holders of Pacific Healthcare Organization (PFHO) stock, I think I should check in on the stock again.

Yesterday, after the bell, PFHO released third quarter earnings. All of the numbers were great: 62% YoY growth in revenues and 67% growth in earnings and EPS (no dilution for several years now). This was in line with my estimate of “~70% growth”.

But of course there is always more to an earnings release than the numbers, and we learned that Pacific Healthcare is likely to lose a customer who has accounted for 14% of their revenues in the first nine months of this year: Companion Property & Casualty is being acquired by Enstar (ESGR), who will take the work in house. If you look at Companion fees earned in Q3 specifically ($311,000), they were slightly less important, at 11% of PFHO’s $2,753,000 total sales.

While it’s not good to lose a 11%-14% customer, I feel that long-term, PFHO is still on track. Another way of looking at things is that PFHO grew revenues in the past 90 days by 150% of the quarter’s Companion fees. In other words, it is as if you merely rewound the clock by 60 days and now you still have the same PFHO. They are losing the customer through no fault of their own. It is not poor performance causing a customer to leave.

The other thing that got people worried was that PFHO expressed uncertainty about the future of another source of fees, for whom PFHO has been doing “overflow” work. This customer was twice the size of Companion and so the market naturally got scared.

Maybe I am naive, but it seems to me like PFHO has proved pretty adept at obtaining new customers, and I believe they will continue to do so. Indeed, they announced the acquisition of a potentially significant UR (utilization review) customer subsequent to the quarter’s end, and they also announced they are re-entering a business (lien representation) due to a favorable Supreme Court decision. Furthermore: “… in November the Company was engaged by a public sector employer to handle its lien representation services…”

Lastly, I do have to wonder if the price drop that we saw starting in August was caused by some large shareholders who got wind of the probable customer loss. That is the only explanation that makes sense to me.

Anyway, I remain long and a believer in Pacific Healthcare’s potential to continue growing. It is now 5.6% below where it was last Friday when I made my first post, linked above.

Nat Hunt

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