It’s more than obvious that 2019 was a year to forget for Medical Facilities Corp (Medical Facilities Corp Stock Quote, Chart, News TSX:DR) but is there an opportunity here in picking up the stock at reduced prices?
Not until there’s some evidence of a break in the downward trend, says Keith Richards of ValueTrend Wealth Management.
Medical Facilities had been coasting along in 2018 and over the first part of last year, gaining 24 per cent over that time span. Then the stock started dropping back in May and, aside from a few rests along the way, DR has kept on falling, ending 2019 down 68 per cent.
The culprit has been disappointing financials. With each quarterly release in 2019, the stock took another hit as investors reacted strongly to drops in revenue and profit, signs that the company’s business model might be faltering.
Medical Facilities, which own surgical facilities in the United States including controlling interest in specialty surgical hospitals and ambulatory surgery centres, last reported its earnings in early November where the company posted third quarter revenue down 2.0 per cent to $102.1 million and adjusted EBITDA down 5.4 per cent to $21.4 million. (All figures in US dollars unless where noted otherwise.)
Management pointed to challenges at its Unity Medical Surgical Hospital in Indiana as a drag on its quarterly financials, while the company also suffered an impairment charge of $22.0 million over the quarter, attributed to poorer performance from its joint venture with NueHealth, a set of ambulatory surgical centres.
But perhaps the bigger story with DR has been its dividend, where annual payments were chopped for the first time in the company’s history, going from C$1.125 to C$0.28 per share. According to management, the payout ratio which was above 100 per cent was unsustainable and necessitated the change. In fact, over its latest quarter, cash available for distributions was at C$5.3 million, equivalent to a payout ratio of 165.3 per cent.
There are positives about the company, however, as free cash flow remained robust over 2019, while surgical case volumes were up over the most recent quarter.
But the stock still looks horrible from a technical perspective and should be avoided, says Richards, president and chief portfolio manager at ValueTrend, who spoke to BNN Bloomberg on Tuesday.
“This is a classic avoid stock. It was in an uptrend and following those rules on higher highs and higher lows and then suddenly, boom. When the trend line is taken out, the past low is taken out, you’ve got a problem,” Richards said. “It resulted in a breakdown and consolidation, a breakdown and consolidation [and another] breakdown and consolidation.”
“I was taught technical analysis in the early 1990s and one of the first rules was, don’t predict, what’s it doing?” he said. “So, this stock is consolidating within a downtrend. I wouldn’t touch it.”
Currently, Medical Facilities’ dividend yield sits at 16 per cent, while the stock has been trading in the $4.00 to $5.00 range for the past two months.