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

    through 2017-2018.

    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


    Recent News

    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.

    Market Data

    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

    Figure 3:

    Source: Team Calculation

    Figure 1: Summary of Market, Valuation,

    and Financial Data

  • CFA Institute Research Challenge 2017 United States Physical Therapy, Inc. (USPH)

    2 | P a g e

    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.

    Company Strategy

    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

    2016 $26.2












    $29,528 $31,926

    Source: Company 10-K, IBIS World











    Private &






    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)