Medical Facilities Corp raises too many red flags, this investor says

Not all companies are created equal and that lesson surely applies to Medical Facilities Corp (Medical Facilities Corp Stock Quote, Chart, News TSX:DR), which while in a demographically fortunate space in healthcare has been a disappointment over the past year.

Investors should be wary of the stock, says portfolio manager Stephen Takacsy, who claims there are too many questions still unanswered.

Medical Facilities Corp, which owns surgical hospitals in the US but is listed in Canada, seems to be in the right place at the right time, as an aging population and further technological advances in health care make for a good combination for the healthcare services sector.

But the company has problems of its own, as represented in its latest quarterly report delivered in November, where Medical Facilities posted a top line of $102.1 million, down two per cent from a year earlier and adjusted EBITDA down 5.4 per cent to $21.4 million. (All figures in US dollars except where noted otherwise.)

Management pointed to challenges faced at its Unity Medical and Surgical Hospital in Mishawaka, Indiana, in particular, citing unfavourable payor and case mix changes, while the company also underwent a non-cash impairment charge over the last quarter of $22.0 million related to underperformance at one of its facilities.

The issues had a hard impact on the stock’s performance over 2019 where it lost 69 per cent of its value. DR has dropped another 25 per cent so far in 2020.

“I'm always very suspicious and leery of a company that has all its assets in the United States listing on the TSX, on a Canadian exchange,” said Takacsy, CEO and chief investment officer at Lester Asset Management, speaking to BNN Bloomberg on Tuesday. “My red flag goes up right away.”

“Second of all, they're really into hospitals and clinics and certain clinical facilities in the US, which is a completely different market and it’s a private market. They were having some profitability problems with some of the hospitals they own, some of the clinics they own,” Takacsy said. “So it's nice to say I want to play the aging demographic [but] I would stick to a Sienna Senior Living or that type of thing with a much safer, much more stable revenue base.”

Even more depressing for shareholders of Medical Facilities, the company cut its dividend by 75 per cent in November, with management saying that the payout ratio had gone about 100 per cent. At the same time, management said that the new dividend rate of $0.28 annually, currently representing a yield of 21 per cent, is sustainable given the company’s operations and available cash.

Takacsy says the dividend issue should be another reason to avoid the stock.

“I saw they had slashed the dividend and I can't tell you what to do at this point but honestly I would take my money and put into something else,” he said. “You don't know how these things end — we’ve seen several companies in the US that are listed in Canada that were in the similar space and it did not end well.”