Florida Population Growth
The population of Florida is roughly 19 million people. Out of these 19 people roughly 30% of Florida residents either reside in Miami Dade or Hillsborough counties. These two counties are highlighted in bright red in the respective graph below. Over 17% of Florida’s population contains senior citizens who are 65 years or age or older. This represents an astronomical opportunity for Metropolitan to grow in the future. In order to be enrolled in Medicare you must be 65 years or older and Florida has the second largest Medicare market in the United States. Over 3 million people are enrolled in the state. Medicare spending by residence in the state of Florida is $39,119. The only state that has a higher Medicare spending by residence rate is California. The annual growth rate of Medicare spending is 8.6% from 1991-2009. This is higher than the average 8.0% rate for the rest of the United States.
MDF Strategic Positioning
One of the most important aspects of Metropolitan Health is how well they can operate in their niche market. Through the Humana contracts, the company has a stronghold in 18 out of the 30 Florida counties. The company also has a lucrative network agreement with CarePlus Health Plans which is a fully owned subsidy of Humana. Customers who choose CarePlus as their health care provider will still have all their medical needs serviced by Metropolitan. At the start of 2011, the company had a presence in 10 out of 22 counties that are covered by CarePlus. Starting in 2011, Metropolitan started to receive capitation fees through CarePlus. CarePlus receives premiums from the Center of Medicare services and then a portion of these premiums get passed on to Metropolitan.
Business Growth Strategies
Metropolitan plans to grow organically as well as make strategic acquisitions when it feels that new synergy will be beneficial to the company. Metropolitan’s revenues are received from health insurance contracts where a capitation fee is paid on a monthly basis. The company assumes all the economic risks of providing all the medical care a patient requires. The company’s revenue is recognized when their customers receive healthcare services. The PSN network that Metropolitan owns receives revenues on a fee-for-service basis. These services are billed to customers. This only represents 0.5% of the company’s total revenue. For the third quarter in 2010 and 2011, Metropolitan received 99.6% and 99.4% of their revenues from Humana. This contract can be terminated at any given time.
In July of 2011, the company took over Continucare Corporation. Continucare was Metropolitan’s biggest competitor and also operated out of Florida. The acquisition was finalized on October 4, 2011. With the Continucare acquisition, Metropolitan now serves over 68,000 Medicare Advantage and Medicaid customers. It owns 33 primary care medical facilities and has access to over 250 health care experts and professionals. Metropolitan has a presence in 18 Florida counties.
As well as providing outpatient care, Continucare also owned and operated over 70 sleep diagnostic centers in 15 states. These centers test patients for a variety of sleeping disorders. Sleep Apnea, which is commonly known as “OSA” in the medical world is one of the most serious misdiagnosed health problems in the United States. The condition can be life threatening because the brain will not send the proper nerve signals to breathing muscles throughout the body for natural respirations. The National Center on Sleep Disorders Research explains that approximately 18 million people suffer from the disease. Continucare tested patients for sleep apnea in two ways. The first way was through a Polysomnography test, which records all the body functions that occur during sleep. This test can determine the severity of sleep apnea. The second test is called a Multiple Step Latency Test. This test measured the rate at which individuals fall asleep. Sleep apnea triggers a variety of other medical issues such as high blood pressure, heart disease, hypertension, memory, sexual dysfunction, mood and depression.
Continucare was acquired for $6.25 per share in cash and for 0.0414 shares of Metropolitan common stock. Metropolitan paid $405.5 million as well as 2.5 million in shares to shareholders of Continucare. The total value of the transaction was roughly $417 million. Previous Continucare shareholders now own 6% of Metropolitan Health.
Forward P/E =9.6x
EV/EBITDA = 10.5x
Price/Sales = 0.87
Price/Book = 3.83
Book Value per Share = $2.40
OCF = $24.2M
LTD = $308M
Current Ratio = 2.50
The last quarter, MDF had a gross margin of 24% with was 600 bips higher than Q4 of 2010 while operating margin was 14%. Company is expected to earn $200M in Q1 with an EPS estimate of $0.25.
One of the prettiest charts of 2011 and I see no reason why the trend should not continue. MDF is in a clear uptrend, and climbing steadily. Florida will only grow in population and senior citizens will have more discretionary income to spend on outpatient services as the economy improves.