Filed Under: ,
Tickers in this Article: AMEX:MDF, USPH, DVA, HUM
Do you own stock in a healthcare provider? I've picked at least two in the past couple of years - US Physical Therapy (Nasdaq:USPH) and DaVita (NYSE:DVA) - and they've both performed admirably. So I thought I'd go to the well once more with micro cap Metropolitan Health Networks, Inc. (Amex:MDF), a Florida-based provider of health care services to 35,000 Medicare patients. It's a tough business, but we'll look at some of the reasons why the best is yet to come.

IN PICTURES: 8 Great Companies With Top-Notch Healthcare Benefits

Margins Increasing
Somebody once wrote that margins aren't everything, and they'd be right. Whole Foods (Nasdaq:WFMI) and The Fresh Market (NYSE:TFM) are two retailers doing things right and both have net margins less than 3%. Having said that, it does make sense to pay attention to the direction they're heading. Metropolitan Health Networks' margins are growing, albeit somewhat erratically, and that's a good thing. In the third quarter ended September 30, 2010, its net margin was 7.4%, 510 basis points higher than the same quarter in 2007. On an annual basis, its net margin has tripled from 2.1% in 2007 to 6.7% in the trailing 12-months. Keep an eye on it.

Stock Performance
Investing in this stock isn't for the faint of heart. In the past 10 years, it's been up or down double-digits with its best year in 2003 when it gained 347% and its worst in 2002 when it dropped 88.2%. In 2010, it was up 124.6% and year-to-date is up 3%. Momentum investors should love it. Interestingly, the stock first traded back in 1997 between $7 and $8 a share but never since. Is 2011 its time to shine?

Allocating Capital
The Motley Fool published an article last November examining companies with efficient management. It looked at three ratios: return on assets, return on equity and return on invested capital. The article's main theme, however, was share repurchases. It selected only those companies who had recently announced share repurchase programs so the results are narrower in scope. Nonetheless, Metropolitan Health Networks appeared on the list averaging 17.9% for each ratio while its competitors averaged 5.1%. Such a glaring difference and yet it trades at a 44% discount to its peers. There appears to be an investor disconnect. Let's find out why.

Lack Of Diversification
Metropolitan Health Networks operates a personal services network (PSN) for Medicare Advantage beneficiaries enrolled in Humana (NYSE:HUM) health care plans. Virtually 100% of its revenue comes from premiums paid by Humana to provide medical services for their customers. In 2009, it received $834 in premiums per customer per month (PCPM). Subtracted from this premium were medical expenses per customer per month of $738, which works out to an annual gross profit of $40.3 million. Two clear risks exist with its business model, a lack of customer diversification and expenses rising faster than revenue. In 2009, premiums received from Humana increased 4.25% while its expenses grew 4.23%. There's little room for error. Thankfully, its medical expense ratio so far in fiscal 2010 is 740 basis points lower year-over-year at 82.3%. If this continues, it won't need a lot of revenue growth to generate increased profits. However, I'd be happy just maintaining them.

Bottom Line
Metropolitan Health Networks has bet the farm on Humana. It appears to be working and as long as they continue to provide satisfactory medical care, that's unlikely to change. Assuming the quality of care continues, I see no reason why the stock won't breakthrough $7 eventually. (To learn more, see Investing In The Healthcare Sector.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center