From $1 to $25

Investors who have owned HMSY Holdings (HMSY) the past decade have done quite well for themselves. Few know what HMSY is, and the business itself is difficult to forecast.

HMSY prevents healthcare, Medicare, and Medicaid fraud. When its clients recover funds from say overpayments, HMSY gets a cut of the proceeds. Every one wins except those trying to pull a fast one over on the government, or their insurance company.

But when I sad business is difficult to forecast, I mean there are many variables that affect HMSY’s profitability. The biggest risk is government risk, as laws and regulations (or rumors of such) can change this company’s outlook in a snap. There’s also repayment risk. Say HMSY saves a commercial health plan a bunch of money. Well, HMSY gets paid when he health plan mails the check, which could be delayed (or not sent at all). The third risk is integrating other companies HMSY purchases to expand its business. I’ve read HMSY conference calls and they are confusing and use jargon only industry specialists and research analysts understand.

Once past the risks, this is a great stock. Since 2003 profits have grown from a nickel a share to almost a dollar, and the stock’s gone from $1 to $25 as of this quarter (stock is selling for $22 today, the data in this article is as of 5/12). Let’s look at HMSY now, and see if — or when — we should get in.

One Year Chart

This stock hasn’t done much in the past year, which is fine with me because I’ve tracked HMSY for years and its almost-always overvalued. The P/E of 28 is reasonable for such a good company, even though the estimated Long Term Growth Rate is only 22%.

Quarterly profits (along the bottom of the chart) look very good, but can’t be trusted. HMSY sometimes misses and guidance gets lowered. Profits aren’t consistent each quarter. For instance the company went from making $0.12 one quarter to $0.27 the next, then back down to $0.15 the following quarter.

Its even hard for me to see what the company really made, as different reports have different amounts. One quarter I had down the company made $0.12. Then Thomson said it made $0.20. Was it $0.12 or $0.20? In another instance, was it $0.23 or $0.15?

Fair Value

I think this stock is worth 30 times earnings, and I think the stock is down because profit growth is only expected to be 5% this year. Looking at the one year chart, the stock dipped below $20 in October of last year, and it would be nice to see it fall below that level again.

Sharek’s Take

HMSY has proven to be one of the top growth stocks in our universe, and the current market correction may give us a chance to get in at a good price. I would love to see the stock fall below $20, which would be 22 times earnings. I think paying 22 times earnings for a 22% grower is fair. Check out the ten year chart below and see for yourself.