U.S. Physical Therapy, Inc. (NASDAQ:USPH)

Physical therapy is of growing importance across the population, and as active Baby Boomers begin to retire they will have more time for both exercise and therapy.

USPH has grown revenue at least nine straight years. The last three years EPS has grown a solid 20%, 32%, and 33%. Valuation looks good too.

Small cap that pays a dividend. Good financial ratios compared to peers.

The way to leverage the emerging ancillary care industry of PT and Massage.

12/13

Baby Boomers and healthcare reform

Baby boomers plus health care reforms points to physical therapy>

Stop Loss @ 16.83

Hidden gem of small cap stocks.

Two words baby boomers

Partners with out-patient physical therapy clinics.

New Hi

Demand will increase as baby boomers age. Good numbers.

With the cost of Health care rising and with our Baby Boomer's aging the Medicare/Medicaid system will have to up date their cost position. This will become extremely profitable for USPH.

Testing out a portfolio of smallish-cap 5-star stocks found using the CAPS screener. All picks have at least 50 allstars backing them, which should be enough to minimize star rating fluctuations. It's only been about a week, and I expect a LOT of volatility, but I have high hopes for market beating performance. Time will tell...

US Physical Therapy operates a network of outpatient physical therapy and occupational health clinics throughout the US. USPH has 292 clinics in 41 states. It focuses its marketing efforts on partnering with orthopedic surgeons and locating clinics to form profitable relationships with surgeons. USPH also has an ownership structure whereby the lead therapist maintains a percentage ownership in the operating clinic – usually around 20%- 35%.

USPH has had a difficult year with reductions in Medicare limits imposed on treatment. Additionally, they face competition from surgeon owned clinics and tight labor markets for skilled therapists. As a result, they have closed some underperforming clinics.
Christopher Reading is a relative newcomer to the company, having been hired in October of 2003 as chief operating officer. He was promoted to CEO in November of 2005.

The Bear Case:
USPH has had a declining bottom line in the last year despite increases in revenue year over year. While management seems forthright and honest about the challenges of the industry, that will not necessarily lead to increases in bottom line profits. Reduced Medicare expenditure and increased therapist costs are not temporary problem, so USPH cannot count on a change in industry dynamics to bail them out.
Additionally, the management team does not seem to be highly invested in the company. They do not appear to own directly many shares of the company at all.

The Bull Case:
Although I always try to write a convincing Bear case first, I struggled a bit, because I do think there are many bullish factors that directly outweigh the bearish factors.

Profitability: While the bottom line has taken a hit lately, I think the management team has acted quickly and decisively. One of the hits to income was costs incurred to close less (read un-) profitable clinics. Clearly, there had been some over reaching in the past. In addition to the obligatory cost cutting, the team has re-focused on the profitable markets and highly lucrative opening of new clinics. From the 2006 letter to shareholders, “Organic growth through start-ups will continue to be an important part of the company’s strategy. It remains an excellent use of capital…” With a ROIC of 23% I heartily agree. One of the most striking things is the remarkable similarity to the retail model that these clinics have.

Operations: I view the ownership structure to be very competitive. Having the lead therapist as a limited partner aligns his or her interest with that of the company and shareholders. The ability to increase the share of ownership from 20% to 35% will also provide ongoing operational incentive.

Management: Although Redding is new to the operation, he has good industry experience. Judging by the quick action regarding clinic closers – a painful short term necessity – he seems to be aligned with the long term interests of the company. Although the company uses options for ongoing incentives, the net shares outstanding have decreased over the last several years due to stock buybacks.
Financials: The balance sheet is strong with little long term debt. Goodwill is a large percentage of assets, but that is probably the nature of the beast when acquisitions are part of your corporate strategy. ROE and ROIC are good, but not stellar. Variability has been apparent but is probably the result of decreased profitability recently.

Valuation: I’m impressed with the company’s cash flow. When they say that new clinics openings are an effective use of capital, they aren’t kidding. With a trailing owner’s earnings of $1.13 per share, I give a valuation range of $19-22 per share. Today’s price of $13.46 gives us a significant margin of safety.

Overall, I’m excited about the future prospects of this company. I think their focus on opening more profitable new clinics in desirable demographic area will provide a long term winner. Lastly, with an ageing active population, this company is in a good position to serve a growing need.

the demand for PT/OT is too large right now and will continue growing. Companies that can utilize fewer therapists and treat more patients will be able to make money.

This stock is an indirect way to play both the aging baby boomer segment and insulate yourself from pricing pressures now being felt by orthopedic medical device makers.

Good numbers and a growing business segment. Formula for making lots of money.

Being in physical therapy myself for work related ergonomic issues (and only being 25), I see a lot of my other friends experiencing the same issues and pursuing treatment. The shortage of physical therapists will only get worse...