21-12-2020, 01:52 AM
PFMT: Boring Business but a Diamond in the Rough
PFMT- Peformant Financial
Overview:
PFMT is a technology-based provider of audit, recovery, payment accuracy, coordination of benefits (COB), and outsource services in the United States. PFMT solutions analyze claims and identify, prevent and correct inaccurate payments. Using their proprietary analytics platform and industry expertise, PFMT helps to reduce losses on billions of dollars worth of improper healthcare payments, state/federal/and treasury tax delinquencies, defaulted student loans and other receivables. Primary customers include government commercial health plans, CMS, Blues plans, regional Insurers, private/commercial programs, etc that operate in complex and highly regulated environments that rely on PFMT's innovative and disruptive approach. Revenue is generated based on a percentage of validated recoveries for clients. Contracts are negotiated on case by case basis, fees may range from 10-30% of recoveries and the duration of contracts may last 3-5 years+. These are high margin, recurring revenue contracts, expected to provide multiple years of prolonged double digit growth.
This is not a sexy business, quite boring in fact. However, a good investment should be boring. Hopefully you will appreciate the new path management has coursed, and see the potential upside in this turnaround story.
Historically, PFMT was known for it's legacy business as a collection agency for student loans, federal/state tax delinquencies and other receivables. Since the taking over of student loan originations by the Federal government a decade ago, PFMTs student loan collections have seen a diminishing contribution to revenues over time. Currently, the student loans collection business accounts for about 22% of revenues. While Other legacy collections still account for about 26% of revenues. Growth in Other legacy collections has remained relatively flat over the years. A smaller business segment derives marginal revenues from first party call centers and licensing of hosted technology solutions to clients. The diamond in the rough refers to PFMT's up-and-coming healthcare business segment, composed of claims auditing and eligibility reviews. After seeing losses in 2018/19 due to high ramp up costs and standard implementation time lags, this segment appears to finally be set up for robust growth going forward. Mgmt has been clear that from 2017-2019, adjusted EBITDA has witnessed a slowdown to reflect a period of transformation in the company to establish itself in the Healthcare space. Management has confidently reiterated their belief in successfully reaching a 2021 goal of achieving $200M revenue with 20% EBITDA margins, with double digit growth continuing for years to come.
Covid-19 Impact:
This year was shaping up to be a strong year for PFMT, as Q1 showed promising results that validated the new trajectory of the company. Unfortunately, Q2 and Q3 were impacted by the public health emergency related to Covid-19. The CARES act brought changes that affected the student loans collection segment. Student loan payments, interest accrual and involuntary collection of payments (wage garnishments) were originally suspended till September 30, 2020 but were extended till December 31, 2020. However, PFMT continued to generate student loan revenue for a number of months from existing in-process borrow rehabilitation agreements. Another impact of Covid came from existing healthcare audit customers, that requested a short-term pause on PFMT activities. Mgmt has indicated these pauses have largely ended during the third quarter. To mitigate the impact of this temporary slowdown, mgmt had furloughed more than 500 employees which could result in savings of about $18 million. The company is now aggressively ramping up efforts (including hiring/recruiting). Mgmt anticipates the ramp up efforts to be properly reflected in revenue by Q1 of 2021.
Healthcare Business:
The healthcare platform has finally reached scale, accounting for the largest (and continually growing) contribution to PFMTs revenue. In Q3, the healthcare business generated $17.6M in revenue (48.5% of total revenues). That is a 20.5% increase on sequential basis and a 63% increase from the same period last year.
Healthcare revenues over last 11 quarters:
Q3 2020= $17.6M
Q2 2020= $14.6M
Q1 2020= $17.5M
Q4 2019=$14.3M
Q3 2019= $10.8M
Q2 2019= $9.3M
Q1 2019= $9M
Q4 2018= $9.9M
Q3 2018= $6.6M
Q2 2018= $6.1M
Q1 2018= $3.5M
This segment will continue to grow as Mgmt has made it clear this will be a main focus for the company. Soon healthcare will be the primary source of revenue (50%++), leading to a market multiple re-rate.
Macro:
The macro environment indicates there should be tailwinds for the audit, recovery, payment accuracy and coordination of benefits outsourcing business solutions PFMT provides. According to the CMS, national healthcare expenditures are forecast to grow at 5.4% CAGR for the next 8 years. Reaching $6.8T by 2028. Despite efforts to reduce the amount of improper payments, error rates in the industry range from 6% in commercial to 14.9% in government plans. Healthcare spending growth is driven primarily by a combination of increasing enrollment and cost inflation. Given the current unemployment environment, we are witnessing a spike in Medicaid enrollment, which should continue to benefit the business via rising utilization and claims volumes. It is useful to note that there can be a lag of several months between Medicaid eligibility and resulting claims volumes. This indicates that a majority of the benefits from the current environment are still to come. Also, as private organizations and state governments are struggling with lower revenues and budget deficits, this could create an increased focus on cost containment strategies where PFMT could play a supporting function. PFMT mgmt sees a $200B+ healthcare TAM growing annually.
Healthcare insurance payments explained
Claim Submissions (Steps 1 + 2): After treating a patient, the healthcare provider submits a claim for reimbursement to the health insurer. The claim will include information on the diagnosis and treatment/procedure
Claim Adjudication (Step 3): The health plan conducts administrative checks (eg. validates provider information and patient eligibility/ coverage) and prices the claim using the providers contract/ fee schedule.
Pre-payment Review (Step 4): The payor will leverage internal tools, followed by third party/outsourced solutions (ie. PFMT offerings) to conduct payment accuracy analysis prior to payment. Errors (discrepancies between the submitted claim and the payors payment policies) are identified and corrected.
Claim Payment (Step 5 + 6): The health plan will reimburse the provider for the patient care and services rendered
Post-payment review (Step 7): The payor will again use internal tools, followed by third party solutions (PFMT) to evaluate prior payments with additional information that has become available (eg. clinical reviews). Payors will correct
Competitors:
PFMT differentiates itself with its proprietary technology and customizable approach to each of their customers' needs. The space is mostly dominated by large, slow moving players, that lack flexibility and uniqueness in their approach. Major competitors include HMS Holdings Corp (HMSY-US, ~~$3B mkt cap) and Cotiviti (acquired in mid-2018 for $4.9B). Contracts in this industry are limited, take time to implement and can last years. PFMT continues to build a moat around it's business by consistently winning, maintaining and being awarded new contracts. An example includes being re-awarded CMS recovery Audit Region 1 and being awarded the newly created Region 5. Thus successfully showcasing PFMTs superior product and path to success in this space. PFMTs will continue to encroach on incumbents' healthcare market share as the market begins to realize the superiority of their technology and approach.
Debt:
On Aug 2017, PFMT entered a credit agreement with an existing shareholder and customer, ECMC. As of September 30, 2020 PFMT has about $62M loan outstanding under this credit agreement. ECMC has been able to accumulate about 5.8M warrants in PFMT as part of the agreement (about 10% of outstanding shares) all at an average exercise price of $1.95. The effective interest rate was about 13.9% in the 1H 2020. The loan is classified as a current liability, with maturity in August 2021. However, PFMT has two one-year options to extend maturity.
PFMT currently (as of Sept 30,2020) has about $17.3M cash and equivalents on hand and is entering a period of FCF generation.
The current low interest rate environment offers low hanging fruit for companies looking to refinance their loans at a lower rate. Reducing their loan rate to 5-8% could save up to $5.5M in annual interest expense.
Timing/Technicals:
As the calendar approached their earnings announcement date (Nov 11), PFMT stock was trading around recent highs of $2. The stock started selling off aggressively into the earnings and significantly further following earnings (despite a very positive release). The selling pressure appears to have been caused by portfolio management layoffs at Invesco, a top holder. Public disclosure of these layoffs coincides with timing of initial selloff, and a recent 13G filing confirms the exited position. This should quell any fears holders and followers of this stock may have had, as the selling was not based on fundamental flaws in the company or a new short thesis. Invesco owned about 18% of PFMT. Following the recent pressure, it appears the stock is in extremely oversold territory. Since their exit, the average volume profile of the stock has improved significantly, making accumulating a position easier for both retail and institutional demand.
Valuation:
The timing of Covid partially contributes to why the market overlooked this stock, as Q2 and Q3 earnings were impacted. To establish a fair EBITDA estimation for 2020, we will use Q1 results with a conservative bias. Q1 is most appropriate because it will give us the clearest picture of how the company was performing prior to the temporary impacts of Covid. Using Q1, EBITDA was $6.4M (after deducting stock compensation). Annualizing that amount will give us an EBITDA run rate of $25.6M. This is a conservative measure becuase we do not account for the impact of any potential interest rate savings or growth in the healthcare segment. Next we need to establish the enterprise value (EV= debt + mkt cap - cash). Which we use to calculate EV/EBITDA. Calculation below.
EBITDA= $25.6M
Enterprise Value (EV)= $62M (debt) + $41 (mkt cap) -$17.3M (Cash) = $85.7 M
EV/EBITDA= 3.3X
Fully diluted share count of 59.7M o/s
Now lets take a look at some Healthcare IT comps. The first 7 are general comps, the bottom 3 are the most similar comps to PFMT. To clarify, HMSY is currently publicly trading and is a direct competitor to PFMT. In December 2019, HMSY acquired Accent (a coordination of benefits/payments accuracy unit of Intrado focused on commercial and Medicare Advantage payers) for $155M. Accent had generated about $50M of revenue during the 12 months ending October 2019 (vs PFMTs $150M revenues in 2019). Based on the transaction price, HMSY paid an estimated 11-12X EV/Ebitda on a TTM basis. COTV was acquired and taken private in 2018, it continues to be a direct competitor with PFMT. COTV operated in payment integrity and was acquired for $4.9B in mid 2018, an estimated EV/EBITDA multiple of 14-15X based on consensus 2019 estimates. Also, keep in mind that the average EV/EBITDA for S&P companies in 2020 is about 14.5X.
Healthcare IT Peer Trading Comp Table
Mkt Cap SHARES O/S EV EV/EBITDA
HMSY 2,793 88.6M 3,021 16.8X
CHNG 5,581 304.5M 10,237 11.2X
ACN 173,423 661.1M 171,554 19X
ADS 3,466 49.6M 24,047 30.3X
HQY 5,013 77M 5,803 27.2X
IQV 34,135 191.7M 45,733 19.5X
CERN 23,727 306.6M 24,167 14X
Average: 19.7X
PFMT 40.5 59.7M 86 3.3X
(fully diluted)
Most Similar Comps:
COTV 4,900 (2019 est) 14.5X
Access 155 (Acquired by HMSY in 2019) 11-12X
HMSY 2,793 88.6M 3,021 16.8X
Average: 14.3X
Best Case: Applying 14X multiple
EV= 25.6 EBITDA * 14 EV/EBITDA= $358.4M
358.4/59.7(fully diluted)= $6 per share
Base Case: Applying 12X multiple
EV= 25.6 * 12 EV/EBITDA= $307.2 M
307.2/59.7= $5.15 per share
Worst Case: Applying 10X multiple
EV= 25.6 * 10 EV/EBITDA= $256M
256/59.7= $4.29 per share
The market still largely views PFMT as a declining student loans collections firm. Yet growing beneath the surface is an attractive healthcare business. As this segment continues to grow the market will recognize the high quality recurring revenue, ability to scale, and increasingly healthcare-focused pure-play as a catalyst for a multiple rerate. Now using the comps above, I will provide 3 scenarios (best, base, worst case scenario) applying a discount to conservatively account for the micro-cap nature and higher leverage of PFMT.
In the best case scenario, we apply a 14X EV/EBTDA ratio (rounded down from the most similar comparable peer average of 14.3X) which, on a fully diluted share basis, lead to a current price per share of $6.
In the base case scenario, we take a couple of notches off the closest peer average and apply a 12X EV/EBITDA ratio. Resulting in a current target price of $5.15/share
In the worst case scenario, we further take off two more notches from the most similar peer average to apply a 10X EV/EBITDA ratio. Resulting in a price of $4.29/share.
Also, considering the existing ownership of the company. Parthenon investors, Prescott Group, Mill Road Capital are all large shareholders. It is not unreasonable to think that they pursue a more aggressive activist role in the company and set it up for sale at a premium. It is also possible that competitors recognize the massive discount of this up-and-coming threat, and decide to acquire PFMT before other market participants drive up the price making such a strategic acquisition far more expensive. All of which offer upside to existing shareholders.
As we approach future quarters and results continue to support this positive narrative we should start to see investor appetite pick up for this name. Average daily volumes have quadrupled since Invesco's recent exiting has added to the freely trading shares, improving the liquidity profile of PFMT. These signals will start appearing on investor screens as they (professional small cap investors, value investors, quant investors, generalists, hedge funds, etc) look for new ideas. There is virtually zero sell-side coverage of this stock at the moment, this will likely change in the future. Accumulating a position now, presents an opportunity for entry at basement level prices in a stock that has the potential to provide 500-700% upside.
Thank you for taking the time to read my idea. Full disclosure, I am long PFMT, i do no hold an employment position with the issuer.
Feedback and criticism of this idea are encouraged. Always do your own due diligence. Ive included the sources used for this analysis in the links below.
Sources:
https://www.performantcorp.com/investors...fault.aspx
https://www.sec.gov/cgi-bin/browse-edgar...er=exclude
https://www.cms.gov/Research-Statistics-...it-Program
https://www.cms.gov/Research-Statistics-...Historical
PFMT- Peformant Financial
Overview:
PFMT is a technology-based provider of audit, recovery, payment accuracy, coordination of benefits (COB), and outsource services in the United States. PFMT solutions analyze claims and identify, prevent and correct inaccurate payments. Using their proprietary analytics platform and industry expertise, PFMT helps to reduce losses on billions of dollars worth of improper healthcare payments, state/federal/and treasury tax delinquencies, defaulted student loans and other receivables. Primary customers include government commercial health plans, CMS, Blues plans, regional Insurers, private/commercial programs, etc that operate in complex and highly regulated environments that rely on PFMT's innovative and disruptive approach. Revenue is generated based on a percentage of validated recoveries for clients. Contracts are negotiated on case by case basis, fees may range from 10-30% of recoveries and the duration of contracts may last 3-5 years+. These are high margin, recurring revenue contracts, expected to provide multiple years of prolonged double digit growth.
This is not a sexy business, quite boring in fact. However, a good investment should be boring. Hopefully you will appreciate the new path management has coursed, and see the potential upside in this turnaround story.
Historically, PFMT was known for it's legacy business as a collection agency for student loans, federal/state tax delinquencies and other receivables. Since the taking over of student loan originations by the Federal government a decade ago, PFMTs student loan collections have seen a diminishing contribution to revenues over time. Currently, the student loans collection business accounts for about 22% of revenues. While Other legacy collections still account for about 26% of revenues. Growth in Other legacy collections has remained relatively flat over the years. A smaller business segment derives marginal revenues from first party call centers and licensing of hosted technology solutions to clients. The diamond in the rough refers to PFMT's up-and-coming healthcare business segment, composed of claims auditing and eligibility reviews. After seeing losses in 2018/19 due to high ramp up costs and standard implementation time lags, this segment appears to finally be set up for robust growth going forward. Mgmt has been clear that from 2017-2019, adjusted EBITDA has witnessed a slowdown to reflect a period of transformation in the company to establish itself in the Healthcare space. Management has confidently reiterated their belief in successfully reaching a 2021 goal of achieving $200M revenue with 20% EBITDA margins, with double digit growth continuing for years to come.
Covid-19 Impact:
This year was shaping up to be a strong year for PFMT, as Q1 showed promising results that validated the new trajectory of the company. Unfortunately, Q2 and Q3 were impacted by the public health emergency related to Covid-19. The CARES act brought changes that affected the student loans collection segment. Student loan payments, interest accrual and involuntary collection of payments (wage garnishments) were originally suspended till September 30, 2020 but were extended till December 31, 2020. However, PFMT continued to generate student loan revenue for a number of months from existing in-process borrow rehabilitation agreements. Another impact of Covid came from existing healthcare audit customers, that requested a short-term pause on PFMT activities. Mgmt has indicated these pauses have largely ended during the third quarter. To mitigate the impact of this temporary slowdown, mgmt had furloughed more than 500 employees which could result in savings of about $18 million. The company is now aggressively ramping up efforts (including hiring/recruiting). Mgmt anticipates the ramp up efforts to be properly reflected in revenue by Q1 of 2021.
Healthcare Business:
The healthcare platform has finally reached scale, accounting for the largest (and continually growing) contribution to PFMTs revenue. In Q3, the healthcare business generated $17.6M in revenue (48.5% of total revenues). That is a 20.5% increase on sequential basis and a 63% increase from the same period last year.
Healthcare revenues over last 11 quarters:
Q3 2020= $17.6M
Q2 2020= $14.6M
Q1 2020= $17.5M
Q4 2019=$14.3M
Q3 2019= $10.8M
Q2 2019= $9.3M
Q1 2019= $9M
Q4 2018= $9.9M
Q3 2018= $6.6M
Q2 2018= $6.1M
Q1 2018= $3.5M
This segment will continue to grow as Mgmt has made it clear this will be a main focus for the company. Soon healthcare will be the primary source of revenue (50%++), leading to a market multiple re-rate.
Macro:
The macro environment indicates there should be tailwinds for the audit, recovery, payment accuracy and coordination of benefits outsourcing business solutions PFMT provides. According to the CMS, national healthcare expenditures are forecast to grow at 5.4% CAGR for the next 8 years. Reaching $6.8T by 2028. Despite efforts to reduce the amount of improper payments, error rates in the industry range from 6% in commercial to 14.9% in government plans. Healthcare spending growth is driven primarily by a combination of increasing enrollment and cost inflation. Given the current unemployment environment, we are witnessing a spike in Medicaid enrollment, which should continue to benefit the business via rising utilization and claims volumes. It is useful to note that there can be a lag of several months between Medicaid eligibility and resulting claims volumes. This indicates that a majority of the benefits from the current environment are still to come. Also, as private organizations and state governments are struggling with lower revenues and budget deficits, this could create an increased focus on cost containment strategies where PFMT could play a supporting function. PFMT mgmt sees a $200B+ healthcare TAM growing annually.
Healthcare insurance payments explained
Claim Submissions (Steps 1 + 2): After treating a patient, the healthcare provider submits a claim for reimbursement to the health insurer. The claim will include information on the diagnosis and treatment/procedure
Claim Adjudication (Step 3): The health plan conducts administrative checks (eg. validates provider information and patient eligibility/ coverage) and prices the claim using the providers contract/ fee schedule.
Pre-payment Review (Step 4): The payor will leverage internal tools, followed by third party/outsourced solutions (ie. PFMT offerings) to conduct payment accuracy analysis prior to payment. Errors (discrepancies between the submitted claim and the payors payment policies) are identified and corrected.
Claim Payment (Step 5 + 6): The health plan will reimburse the provider for the patient care and services rendered
Post-payment review (Step 7): The payor will again use internal tools, followed by third party solutions (PFMT) to evaluate prior payments with additional information that has become available (eg. clinical reviews). Payors will correct
Competitors:
PFMT differentiates itself with its proprietary technology and customizable approach to each of their customers' needs. The space is mostly dominated by large, slow moving players, that lack flexibility and uniqueness in their approach. Major competitors include HMS Holdings Corp (HMSY-US, ~~$3B mkt cap) and Cotiviti (acquired in mid-2018 for $4.9B). Contracts in this industry are limited, take time to implement and can last years. PFMT continues to build a moat around it's business by consistently winning, maintaining and being awarded new contracts. An example includes being re-awarded CMS recovery Audit Region 1 and being awarded the newly created Region 5. Thus successfully showcasing PFMTs superior product and path to success in this space. PFMTs will continue to encroach on incumbents' healthcare market share as the market begins to realize the superiority of their technology and approach.
Debt:
On Aug 2017, PFMT entered a credit agreement with an existing shareholder and customer, ECMC. As of September 30, 2020 PFMT has about $62M loan outstanding under this credit agreement. ECMC has been able to accumulate about 5.8M warrants in PFMT as part of the agreement (about 10% of outstanding shares) all at an average exercise price of $1.95. The effective interest rate was about 13.9% in the 1H 2020. The loan is classified as a current liability, with maturity in August 2021. However, PFMT has two one-year options to extend maturity.
PFMT currently (as of Sept 30,2020) has about $17.3M cash and equivalents on hand and is entering a period of FCF generation.
The current low interest rate environment offers low hanging fruit for companies looking to refinance their loans at a lower rate. Reducing their loan rate to 5-8% could save up to $5.5M in annual interest expense.
Timing/Technicals:
As the calendar approached their earnings announcement date (Nov 11), PFMT stock was trading around recent highs of $2. The stock started selling off aggressively into the earnings and significantly further following earnings (despite a very positive release). The selling pressure appears to have been caused by portfolio management layoffs at Invesco, a top holder. Public disclosure of these layoffs coincides with timing of initial selloff, and a recent 13G filing confirms the exited position. This should quell any fears holders and followers of this stock may have had, as the selling was not based on fundamental flaws in the company or a new short thesis. Invesco owned about 18% of PFMT. Following the recent pressure, it appears the stock is in extremely oversold territory. Since their exit, the average volume profile of the stock has improved significantly, making accumulating a position easier for both retail and institutional demand.
Valuation:
The timing of Covid partially contributes to why the market overlooked this stock, as Q2 and Q3 earnings were impacted. To establish a fair EBITDA estimation for 2020, we will use Q1 results with a conservative bias. Q1 is most appropriate because it will give us the clearest picture of how the company was performing prior to the temporary impacts of Covid. Using Q1, EBITDA was $6.4M (after deducting stock compensation). Annualizing that amount will give us an EBITDA run rate of $25.6M. This is a conservative measure becuase we do not account for the impact of any potential interest rate savings or growth in the healthcare segment. Next we need to establish the enterprise value (EV= debt + mkt cap - cash). Which we use to calculate EV/EBITDA. Calculation below.
EBITDA= $25.6M
Enterprise Value (EV)= $62M (debt) + $41 (mkt cap) -$17.3M (Cash) = $85.7 M
EV/EBITDA= 3.3X
Fully diluted share count of 59.7M o/s
Now lets take a look at some Healthcare IT comps. The first 7 are general comps, the bottom 3 are the most similar comps to PFMT. To clarify, HMSY is currently publicly trading and is a direct competitor to PFMT. In December 2019, HMSY acquired Accent (a coordination of benefits/payments accuracy unit of Intrado focused on commercial and Medicare Advantage payers) for $155M. Accent had generated about $50M of revenue during the 12 months ending October 2019 (vs PFMTs $150M revenues in 2019). Based on the transaction price, HMSY paid an estimated 11-12X EV/Ebitda on a TTM basis. COTV was acquired and taken private in 2018, it continues to be a direct competitor with PFMT. COTV operated in payment integrity and was acquired for $4.9B in mid 2018, an estimated EV/EBITDA multiple of 14-15X based on consensus 2019 estimates. Also, keep in mind that the average EV/EBITDA for S&P companies in 2020 is about 14.5X.
Healthcare IT Peer Trading Comp Table
Mkt Cap SHARES O/S EV EV/EBITDA
HMSY 2,793 88.6M 3,021 16.8X
CHNG 5,581 304.5M 10,237 11.2X
ACN 173,423 661.1M 171,554 19X
ADS 3,466 49.6M 24,047 30.3X
HQY 5,013 77M 5,803 27.2X
IQV 34,135 191.7M 45,733 19.5X
CERN 23,727 306.6M 24,167 14X
Average: 19.7X
PFMT 40.5 59.7M 86 3.3X
(fully diluted)
Most Similar Comps:
COTV 4,900 (2019 est) 14.5X
Access 155 (Acquired by HMSY in 2019) 11-12X
HMSY 2,793 88.6M 3,021 16.8X
Average: 14.3X
Best Case: Applying 14X multiple
EV= 25.6 EBITDA * 14 EV/EBITDA= $358.4M
358.4/59.7(fully diluted)= $6 per share
Base Case: Applying 12X multiple
EV= 25.6 * 12 EV/EBITDA= $307.2 M
307.2/59.7= $5.15 per share
Worst Case: Applying 10X multiple
EV= 25.6 * 10 EV/EBITDA= $256M
256/59.7= $4.29 per share
The market still largely views PFMT as a declining student loans collections firm. Yet growing beneath the surface is an attractive healthcare business. As this segment continues to grow the market will recognize the high quality recurring revenue, ability to scale, and increasingly healthcare-focused pure-play as a catalyst for a multiple rerate. Now using the comps above, I will provide 3 scenarios (best, base, worst case scenario) applying a discount to conservatively account for the micro-cap nature and higher leverage of PFMT.
In the best case scenario, we apply a 14X EV/EBTDA ratio (rounded down from the most similar comparable peer average of 14.3X) which, on a fully diluted share basis, lead to a current price per share of $6.
In the base case scenario, we take a couple of notches off the closest peer average and apply a 12X EV/EBITDA ratio. Resulting in a current target price of $5.15/share
In the worst case scenario, we further take off two more notches from the most similar peer average to apply a 10X EV/EBITDA ratio. Resulting in a price of $4.29/share.
Also, considering the existing ownership of the company. Parthenon investors, Prescott Group, Mill Road Capital are all large shareholders. It is not unreasonable to think that they pursue a more aggressive activist role in the company and set it up for sale at a premium. It is also possible that competitors recognize the massive discount of this up-and-coming threat, and decide to acquire PFMT before other market participants drive up the price making such a strategic acquisition far more expensive. All of which offer upside to existing shareholders.
As we approach future quarters and results continue to support this positive narrative we should start to see investor appetite pick up for this name. Average daily volumes have quadrupled since Invesco's recent exiting has added to the freely trading shares, improving the liquidity profile of PFMT. These signals will start appearing on investor screens as they (professional small cap investors, value investors, quant investors, generalists, hedge funds, etc) look for new ideas. There is virtually zero sell-side coverage of this stock at the moment, this will likely change in the future. Accumulating a position now, presents an opportunity for entry at basement level prices in a stock that has the potential to provide 500-700% upside.
Thank you for taking the time to read my idea. Full disclosure, I am long PFMT, i do no hold an employment position with the issuer.
Feedback and criticism of this idea are encouraged. Always do your own due diligence. Ive included the sources used for this analysis in the links below.
Sources:
https://www.performantcorp.com/investors...fault.aspx
https://www.sec.gov/cgi-bin/browse-edgar...er=exclude
https://www.cms.gov/Research-Statistics-...it-Program
https://www.cms.gov/Research-Statistics-...Historical