Healthcare stocks: buy acquisitive CRH Medical

Headquartered in Vancouver, CRH Medical sells products and services to doctors who screen and treat gastrointestinal ailments. Until recently, CRH was a medical device company, boasting a single product. But in 2014, the company bought Gastroenterology Anesthesia, a medical services business specializing in anesthesiology for gastrointestinal procedures. Calgary-based Acumen Capital analysts Brian Pow and Oliver Shao have a ‘buy’ rating on this acquisition-oriented healthcare stock.

CRH Medical Corp. (TSX─CRH) is headquartered in Vancouver. But it recently headed down to the Bluegrass state where it bought a 50 per cent stake in Knoxville Gastroenterology Anesthesia, a Kentucky-based company with estimated annual revenues of US$6.5 million.

Acumen analysts Brian Pow and Oliver Shao like the acquisition, believing it will give the healthcare stock a net EBITDA (earnings before interest, tax, depreciation and amortization) of US$1.7-$1.8 million a year, assuming an EBITDA purchase multiple of 4.8-five.

For both analysts, CRH continues to merit a “buy” recommendation, albeit a speculative one.

They’re also boosting their 12-month price target to $6.20 from $5.10 a share. They write:

Admittedly, EBITDA margins for Knoxville Gastroenterology Anesthesia will trail those for Gastroenterology Anesthesia, a company CRH bought in 2014.

But CRH says the margins for the Kentucky company are still healthy, considering the rural nature of the practice where costs are traditionally lower.

Although CRH gave no metrics for the Kentucky purchase, we estimate it paid US$8-$9 million for its 51 per cent stake. We base this on CRH’s acquisition of Gastroenterology Anesthesia.

CRH financed the deal using cash on hand — approximately US$6.5-$7.5 million — as well as US$1.5 million of its own shares.

Not only is the company’s latest purchase its first joint venture, but the structure of the deal itself will likely appeal to a broader segment of possible acquisition targets among healthcare stocks. In fact, this will probably speed up the pace of future acquisitions.


Investor’s Digest of Canada, MPL Communications Inc.
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