Thursday, September 9, 2010

Backing up the truck...

Given the precipitous decline in the stock price of AHS I thought now would be a good time for a second look. To recap, AHS reported decent results last quarter, BUT they also announced an acquisition which they’re completely funding with stock (thereby massively diluting existing shareholders). They’re also assuming 136 MM in additional debt in conjunction with the acquisition. IMHO it’s the dilution and debt burden that has caused the sell off, which may in turn be an opportunity to buy more shares.

So now that AHS has new operations, new cash flows, and a new capital structure, (and a new stock price!) let’s do a quick and dirty valuation analysis. Assuming a stock price of $5, the company has an EV of about 400MM and a market cap of 206MM. IF we also take management at their word and model 30MM in additional EBITDA from the acquisition, then we’ve got pro forma EBITDA of 71MM on revenue of 904MM – this means AHS is trading at an EV/EBITDA of 5.6x.

Now let’s run through a hypothetical (but very reasonable) 5-year scenario. First, we’ll assume that EBITDA will grow steadily to 90MM by the fifth year (btw this is a pretty conservative assumption given that EBITDA before the acquisition in 2008 was 95MM). Second, we’ll assume all EBITDA during our 5 year analysis goes toward paying down debt, paying interest, rebuilding working capital, and capex. Because AHS has low ongoing capital requirements, it’s not unreasonable to assume they can pay off all their debt within our 5 year window.

So, in our hypothetical situation, at year 5 AHS as a pretty simple company – it’s essentially cash free / debt free, it has EBITDA of 90MM (which we can assume is growing at a low single digit % going forward), and the majority of EBITDA converts to FCF. The question is, how much would you pay for this asset?

The answer, of course, is “it depends,” but I think it’s reasonable to assume the company could trade somewhere between 4x (very conservative) and 8x EV/EBITDA, giving us a market cap somewhere between 360MM and 720MM (or a stock price between $8.75 and $17.50). Now obviously I have no idea if this is how things will play out, but it feels like a high risk/high reward situation. Remember, AHS does have a lot of leverage and if the economy falls off a cliff AHS could be in real trouble. However, I think this is a risk worth taking, so I purchased an additional 550 shares (giving me a total of 1750) today at a price of $4.68.