Stay clear of Medical Facilities Corp for now, this fund manager says

The healthcare sector may seem like the perfect place for defensive-minded investors to park their money, but it all depends on the name — and Medical Facilities Corp (Medical Facilities Corp News, Stock Quote, Chart TSX:DR) may be one you’ll want to skip, says Jeff Parent, Chief Investment Officer with CastleMoore, who advises current shareholders to trim their positions on DR.

An aging global population combined with medical advances leading to prolonged living in later years are factors supporting the long-term bullish prospects for healthcare stocks, a space which runs the gamut from drug companies and biotech firms to hospitals and clinics and has collectively provided robust returns over the past decade.

BC-based Medical Facilities, which owns surgical facilities in the United States, had been performing well over the past couple of years, gaining 43 per cent in value between November 2017 and March of this year, and that came with a dividend paying close to nine per cent.

But the stock has dropped plenty over ensuing weeks, going from a high of $17.64 on March 29 to where it currently trades in the mid-C$12.00 range. Much of the damage came in May when Medical Facilities released its first quarter 2019 financials, which showed a slowdown in revenue growth. Over 2018, the company grew its top line by 12 per cent, including a 10.8-per-cent growth recorded over Q4. But the latest quarter saw revenue grow by just 1.5 per cent to $99.1 million, which income from operations decreased by 27.8 per cent to $10.2 million. (All figures in US dollars unless noted otherwise.)

Management chalked up the slowdown to the ups and downs of the business, saying that strategic M&A was still a company priority.

“Our first quarter results underscore the importance of expanding our service offering and revenue base,” said Robert O. Horrar, President and CEO, in a press release on May 9. “Our business is subject to variations in case volumes, as well as changes in payor and case mix. This past quarter, the changes in our payor and case mix resulted in lower revenue growth and impacted our operating results. That being said, our strategy has not changed. We remain focused on capitalizing on opportunities to diversify our assets through strategic acquisitions and development of physician-aligned ambulatory surgical centers and surgical hospitals, as well as driving same facility growth.”

But Parent says investors should be cautious with Medical Facilities, and he warns that the dividend may not be safe.

“It had a very significant drop and has not recovered,” said Parent, to BNN Bloomberg on Friday. “The markets are saying that there’s a lot of concern about their dividend. It’s a bit risky. I’d be very, very careful with this. Cutting bait is probably a bad analogy but reducing, for sure, because if this drops below $12.00, it really could have a big tumble.”

“I don’t like the relative action —relative to the markets and to other stocks like this. There are a lot of poor indicators and volume is weak, also. You don’t see that big selloff happening just yet, other than on that day that it dropped,” he says.

Medical Facilities announced its latest monthly dividend payment on June 19, paying out C$0.09375 per share and marking the 183rd consecutive dividend payment since the company’s inception, according to management.

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