About Emergent Group
Emergent Group provides mobile medical laser and surgical equipment in 16 states on a per-procedure basis to hospitals, outpatient surgery centers and physicians' offices. Surgical equipment is provided to customers along with technical support personnel to ensure that such equipment is operating correctly. Through its wholly owned subsidiary PRI Medical, the company currently offers its services in five states in the western United States and 11 states along the eastern seaboard.
Company Website: http://www.emergentgroupinc.com/
Stock Symbol: LZR
Market Cap: $48 million
Investment Thesis
Emergent seems to be in the right place at the right time. The market for mobile laser/surgical equipment is expected to grow at low double digit rates for the next few years thanks to favorable demographics (older populations require more health care services) and hospitals looking for cost effective medical solutions. Emergent rents its laser and surgical equipment on a per use basis to hospitals and physician offices. This service is in great demand because hospitals are starting to see that they can save money by simply renting Emergent's equipment instead of purchasing the often expensive laser and surgical equipment. Also Emergent provides the necessary technical support which is another added benefit to hospitals who may not have staff experienced using this kind of equipment. Furthermore this business model allows hospitals and physicians to give their customers access to the latest technology.
The company operates in only 16 states so the potential for growth is there along with possible international opportunities later on. Another source of future growth is through expanding their product offerings. Right now the company mainly rents surgical and laser equipment used for BPH, urinary incontinence, pelvic organ prolapse, menorrhagia, cryosurgery for treatment of prostate cancer, TMR heart surgery, and lithotripsy. The company also offers lasers used in popular cosmetic procedures.
One of Emergent's greats appeals is that it operates in an almost recession proof industry which holds up well during periods of economic weakness. While the economy has been horrendous over the last 3 years, Emergent has grown revenues and cash flow every year which is quite a testament to the strength of the business model. However the CEO did warn investors that while there is always risk of people delaying certain procedures they cannot do so indefinitely.
Another thing I like about the company is that the stock is trading at fair price. Based on 2009 earnings of .49 cents the company only trades at 14 times earnings which is attractive considering it is a growing company with strong fundamentals. Best of all the company pays a large dividend which equates to a 5.8% yield. While some might see the large dividend as evidence that the company has few growth prospects, I disagree. This simply reflects the advantages of the company's business model which requires little capital expenditures to grow. It also reflects management's treatment of shareholders (they prefer giving the money back to the company's owners instead of wasting it).
As with all investments there are risks that must be considered as well. The primary risk is that larger and more diversified companies get involved in this industry because of its attractive fundamentals and compete on price. This could easily squeeze margins and force smaller names like Emergent out of business. So far this has not occurred but it is always a serious risk.
Management
Since 2003 the company has been run Bruce Haber who has 27 years of experience in the health care industry and running businesses. The management structure is a bit peculiar. Officially Bruce Haber is President of BJH Management, LLC, a management firm specializing in turnaround consulting and private equity investments. Emergent entered into an agreement with BJH Management to contract the services of Mr. Haber to serve as the company's Chief Executive Officer. I really can't find any problem with the company's current management and they seem more interested in value creation as opposed to looting the company (always a positive). Management and the board together own approx 48% which certainly align their interests with shareholders. More importantly the company pays a strong dividend which is extremely rare for a small cap company which is growing at double digit rates. Bottom line: since present management took over the stock has gone from .40 cents to $6.95 in 7 years. You can't argue with results.
Financial Position
Emergent is in a very strong financial position with $5.3 million in cash and little debt. More importantly the company generates substantial cash flow which easily covers the large dividend. One favorable aspect of the company's business model is that a lot of their revenue is recurring with minimal capital expenditures which gives the company financial flexibility.
Major Investors
The company for the most part is unknown on Wall Street and as such enjoys little institutional interest. The company's shares are mainly owned by management and the board of directors with the CEO owing 24% of the company. Only 8% of shares are held by institutions with the rest owned by retail investors.
Summary
Emergent is a small cap company which offers the unique advantage of providing investors with growth and a large dividend. The company's business is somewhat protected from economic fluctuations which gives investors more stability than other cyclical companies. The only problem I see with the company is a lack of catalysts to significantly move the stock. While this may not be a drawback to some I usually like to know that my investment will not be simply left up to the direction of the general stock market. However, if you are looking for a company with good growth prospects and in a stable industry Emergent may be for you.
Black Swan Insights
Disclosure: Nothing yet but strongly considering buying the stock.
Legal Disclaimer: I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset. (I know this is a stupid statement but for legal purposes I have to say it. Thanks)
