HMS Holdings Corp.: A picture of good health
Health care is becoming more of a hot-button issue (if that’s possible) as the United States gears up for the 2008 presidential election. Saving money in the midst of rising health-care costs is important not only to consumers but to other cogs in the multi-sprocketed system as well — the insurers, hospitals, pharmacists, doctors, and the federal and state governments.
Government is where HMS Holdings Corp. (Nasdaq: HMSY) enters the picture and plays a substantial penny-pinching role. Using data from 260 insurers, along with government information on eligibility and claims, HMS makes sure that the correct party is paying for the health-care services rendered.
A New York City-based company, HMS Holdings helps government entities keep costs under control by ferreting out any errors in benefit outlays. While the mistakes are relatively small, they’re bound to be buried in the programs’ paperwork.
HMS — the leader in providing such services to government health-care programs — says that in 2006, it recovered more than $1 billion for its clients and was able to provide data that helped them save several billions more. The Health Management Systems subsidiary of HMS Holdings provides services to 40 of the 50 states and counts a majority of the nation’s VA centers as its clients.
With the baby boomer generation heading toward retirement with a growing dependency on taxpayer-funded programs such as Medicare and Medicaid, it appears that the business opportunities for HMS Holdings can only get healthier in the years ahead. It’s also likely to remain recession-proof.
As a result, five analysts who follow HMS all have a “buy” or “outperform” rating on the company’s stock.
In the past year, the company has grown tremendously, thanks to the September 2006 acquisition of its prime competitor, the Benefits Solutions Practice Area (BSPA) of Public Consulting Group Inc. The cash-and-stock deal, valued at $105.6 million, increased the size of the HMS operations by approximately 70%.
HMS Holdings reported a strong third quarter on Nov. 1 that beat analysts’ estimates. For the three months ended Sept. 30, revenue grew 79% to $37.7 million. Net income rose to $4.1 million, or $0.16 per share, compared with $600,000, or $0.03 per share, seen in the same quarter in 2006.
At the same time, HMS also raised its 2007 full year guidance, and is looking for revenue of between $140 million to $145 million and for adjusted EBITDA in a range of $38 million to $40 million. For 2008, HMS issued guidance for full-year revenue to rise 17.2% to $170 million from its 2007 expectations, with an adjusted EBITDA estimated to increase 22.5% to $49 million.
“Our fundamentals remain strong,” said Robert Holster, HMS Holdings chairman and chief executive officer, said in a statement, “and in 2008 we foresee sustained growth …”
On the conference call with analysts, Holster answered a pressing question facing investors: how to discern what profits came from the BSPA acquisition and what was due to organic growth.
“Beginning with this quarter,” Holster said, “we can be quite precise about revenue growth. … Comparing our actual $37.7 million in Q3 ’07 to the pro forma Q3 ’06 reveals that we grew Q3 to Q3 at a 21% rate. All of our business lines contributed to this growth.”
The company has announced other deals, including the October acquisition of Permedion, a company that has more than 25 years’ experience in evaluating Medicare and Medicaid claims. New contracts have included extensions with California, Texas, Georgia and Michigan.
With Medicaid and Medicare spending expected to top $1 trillion annually by 2010, and with all the belt-tightening efforts taking place, states are looking to make sure the parties responsible are paying, and HMS simplifies the process.
All of this means that analysts are taking notice of HMS Holdings, and to analyst Richard Close of Jefferies & Co., “it’s a no-brainer” for state and federal agencies to take advantage of its services.
“This has been a good name, a good stock for 2007,” analyst Close told SmallCapInvestor.com. “There remains plenty of growth out there for these guys to tap into.”
Close initiated coverage of HMS Holdings in February with a “buy” rating, and indicated that he hasn’t seen any reason to alter that opinion. On Nov. 2, following the third-quarter financials release, the Jefferies analyst did increase his price target to $32 from $29.
While HMS Holdings does operate in four-fifths of the states, “they are not doing all the services in all the states,” Close noted. “There is an opportunity for them to extend the scope of their client services.”
Other growth areas for HMS Holdings would include more long-term care programs and the many underfunded pensions and retiree benefits programs, Close said. After listening to the management conference call, Close issued a Nov. 5 note to clients in which he said that the company’s expansion plans that are targeted at sustaining 15% to 17% annual growth could mean its 2008 guidance is “conservative.”
On Nov. 30, Bank of America’s Micheal Yuan initiated coverage with a “buy” rating and a 12-month price target of $40. His positive outlook on HMS Holdings noted that “the threat of federal budget cuts is boosting demand by state Medicaid programs for HMSY’s services, and tougher competition is doing the same at managed-care plans.”
Yuan also wrote that the company’s “scale and experience are major advantages,” and that the potential of upcoming Medicare and Medicaid contract awards could bring HMS Holdings $50 to $80 million in revenue and boost earnings per share by $0.20 to $0.30. Yuan also labeled the company’s 2008 guidance as “too conservative.”
Shares of HMS Holdings, which was added to the Russell 3000 Index in June, hit a 52-week high of $33.54 on Nov. 19, compared with the 52-week low of $14.05 seen on Dec. 13, 2006. During 2005 to 2006, shares traded between $6.75 and $16.20. The stock was trading at about $30.75 on Thursday.
When the company reports its 2007 results early next year, analysts surveyed by Thomson Financial are expecting HMS Holdings to post earnings of $0.57 per share, up from the year-ago $0.22, on revenue of $145 million, which would be 64% more than the $88 million of 2006.
Holding a stake in HMS Holdings (HMSY) might not make an investor’s portfolio the absolute picture of good health, but it probably won’t make it sick, either.
