2017CFA-IRC€UT Dallas€‘Final Report-USPH
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CFA Institute Research Challenge
Hosted by CFA Societies Texas, Louisiana and Oklahoma
Local Challenge Southwest U.S.
University of Texas at Dallas
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
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University of Texas at Dallas Student Research Medical Care Industry, Healthcare Sector
New York Stock Exchange
U.S. Physical Therapy, Inc.
Date: 2/8/17 Current Price: $71.45 Recommendation: Sell Ticker - NYSE: USPH Headquarter: Houston, TX Target Price: $58.24
We issue a sell recommendation on a price of $58.97: USPH is doing very well financially, but the market has overvalued its growth. We see its current price as a reflection of
market sentiment rather than its fundamental valuation. Our DCF, DDM, comparable,
transactional and Monte Carlo simulation methods (Figure 1&3, Appendix 4) all project a price
range between $28 to $63 per share. We project that total clinic growth will continue to increase
at a linear rate through de novo clinics and acquisitions, with a heavier emphasis on acquisition
Conservative growth and financing strategy is successful so far: Revenue has grown a compounded annual rate of 9.1% since 2011. Dividend payout has doubled in the same time
frame even though net profit margin has decreased from 9.2% to 6.4%. This growth has been
financed mostly by the companys own cash and the use of a revolving credit line. The interest
expense over the last 6 years is less than $5 million total. The total clinic number has nearly
doubled from 10 years ago.
Strong liquidity, solvency and operating ratios: Strong cash position every year results in solid liquidity ratios, current ratio is 2.7 and cash ratio is 0.65. A revolving credit line is used
to give easy access to over $100 million in funds at minimal cost. Solvency and coverage ratios
are substantial at 53.8 EBITDA coverage and 0.39 L/E ratio. Accounts receivable is at a
comparable rate to the industry and its peers, and Account payable is less than $3 million every
USPH Breaks into New 52-Week High 1/5/17: A new 52-week high was reached by USPH at a peak per share price of $73.05. Shares closed for the day at $72.55 for a market cap
of $908.47 million and an intra-day move of 0.07%; the volume for the day was 59,562.
USPH Buys Majority Interest in 17 Clinics 1/4/17: A 70% stake in a yet unnamed clinic group was acquired for $11.4 million. The clinics generate $11 million in annual revenues with
just over 100,000 patient visits. They purchased 17 and 8 are under management.
USPH Announces 12 Clinic Group Acquisition 12/1/16: Chris Reading, USPH CEO, said they are extremely pleased to complete this transaction with a very talented and capable
group of partners. This practice has been recognized as National Physical Therapy Practice of the
Year, similar to several other award winning practices which have elected in recent years to join
our large and growing family of partnerships. 60% interest was acquired by USPH for a purchase
price of $11.5 million. The clinic group generates more than $10 million in revenue per year and
sees 90,000 plus patients visits per year.
Closing Price $71.45 52-Week Range $45.76 - $73.05 Average Daily Volume 53,545 Market Capitalization 899.17M Price/Earnings Ratio 36.89x Dividend yield 0.95 Earnings per Share $1.94 Share outstanding 12.52M Beta 0.99
Source: S&P Capital IQ, Yahoo finance, Team Calculation Valuation date: December 31, 2016
Source: Yahoo finance
Figure 2: Historical USPH Stock Price
Source: Team Calculation
Figure 1: Summary of Market, Valuation,
and Financial Data
CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)
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Business Description U.S. Physical Therapy, Inc. was founded in 1990 and is the largest publicly-traded, pure-play
operator of outpatient physical and occupational therapy clinics in the United States. Operating
over 500 outpatient clinics in 42 states, they specialize in pre and post-operative care for
orthopedic-related disorders, sports-related injuries, preventative care, injured worker
rehabilitation and other physical injuries. Their operative model for the clinics is a 1% general
partnership ownership, along with 49% to 94% stake as a limited partner. They partner with
licensed physical therapists who own the minority share of the clinics and manage their
The primary sources of revenue for USPH are patient revenues via care and insurance plans. No
payor currently contributes more than 30% of overall revenue (Figure 4). Commercial Health
Insurance leads revenue streams for USPH at 28%. Managed care (Private) is 23% and is
combined with Other (6%) to provide a better comparison to the industry. Medicare/Medicaid
and Workers comp round out the rest of the payor group.
USPHs growth and success are built upon their business model and competitive strategy. They
seek physical therapists to partner with and build clinics that are operated, and partly owned, by
physicians. This method of growth is what they call de novo clinic development. The location
is usually in the local area of the therapist in order to leverage the relationships and reputation of
the minority partner. These arrangements typically involve up to a 5-year employment agreement,
a non-compete addendum, and an increasing limited interest. The limited partner usually begins
with a 20% interest that increases 3% annually to a maximum of 35%. USPH has the right, but
not the obligation, to buy the non-controlling interest at the end of the period. This buyout is
usually at a predetermined EBIT multiple.
Each clinic has a local independent identity, and they are assisted by the various corporate support
services provided by USPH including marketing, national purchasing, negotiated third-party
payor contracts, site selection, construction, accounting and billing systems, training, and various
other business functions.
Acquisitions play an important role in the strategy of USPH. During the past 5 years, from
2011to 2015, USPH has bought 120 clinics (Figure 5). The de novo clinics typically lose money
for about a year before they become profitable, and so they are usually an early-stage drag on
earnings. By growing via acquisitions, USPH can quickly add profitable business in new
geographic areas. They do not follow a set M&A plan; but rather, they seek to find strong
business, with good partners and physical therapists, and then buy the clinics.
This conservative approach to growth is consistent throughout their business model (Figure 6).
They maintain manageable debt, low accounts payable, moderate growth, adequate cash on hand
and pay a reasonable dividend to their investors. We recognize this steady approach to their
business throughout our analysis.
Industry Overview and Competitive Positioning Physical therapy is a $30 billion plus industry. It is poised for continued growth in the next several
years due to several macroeconomic and demographic trends (Figure 7). The industry is highly
fragmented, with about 45% of the industry comprised of small independently owned clinics.
The largest 50 companies in the sector comprise less than 25% of the total market, and no single
participant captures more than a 5% market share1.
Growth and Demand-Side Drivers
Healthcare disbursements are expected to climb to over $5.6 trillion by 2025 (Figure 8). This
increase is due to an expanding patient population from an increase in the mean population age,
employment growth, and consumer emphasis on healthy lifestyles and activities. Changes in the
healthcare industry are driving increased numbers of patients to use physical therapy services.
Earlier patient discharges, surgery alternatives, and an emphasis on preventative care are all
focuses of the healthcare industry to reduce costs. Physical therapys clinical effectiveness
provides a solution to the rising costs of healthcare.
Year Total Price
Clinics & MI
2011 $29.9 20
2012 $10.2 14
2013 $48.5 45
2014 $17.8 20
2015 $26.0 21
Source: Company 10-K, IBIS World
Figure 4: Revenue Source, Payor Mix
USPH Outer Ring
Physical Therapy Industry Inner Ring
Figure 6: Total Acquisition Costs & #
of Clinics Acquired
Figure 7: PT Industry Revenue (mil)