InfuSystem: Negative Pressure On Shares From Covid-19 Will Subside – InfuSystem Holdings Inc. (NYSEMKT:INFU)

Some of my readers may have heard about something called Covid-19? Okay, just trying to add a little humor to our otherwise chaotic world. For sure, shareholders of InfuSystem (INFU) are aware of Covid-19 as the related selloff in stocks dropped INFU shares from a 52-week high of $11.89 to a post-Covid-19 low of $5.47 (a 54% drop) in less than a month. Ouch!

As I provide readers with an update on INFU after its Q4 2019 earnings report and conference call, I think it will become clear that INFU’s 50% plus market cap drop represents an example of Wall Street “throwing the baby out with the bathwater.” To be clear, as with most companies, INFU may be negatively impacted, especially in the short term, by the impact of Covid-19. But even in a scenario where the pandemic lasts 18 months, it is all but certain that a 50% haircut to INFU shares is overblown. Eventually, the “negative pressure” on shares will subside as INFU wins business through a new partnership with Cardinal Health (CAH), involving negative pressure wound therapy, and continues to execute on its business plan.

As discussed below, INFU management addressed the Covid-19 situation on its recent conference call. Even with some possible disruption related to the virus (there had been little to none as of the March 19 call), investors should understand that INFU’s growth story (which the market arguably had not priced in fully even at $11.89/share) remains intact. INFU can still leverage its dynamic integrated therapy services (ITS) platform and its new relationship with CAH to drive meaningful increases to its adjusted EBITDA, EPS, and cash flow. With its growth and the tailwind of a likely addition to the Russell 2000, INFU shares are currently a bargain at roughly 6x EBITDA.

For those new to INFU, I highly recommend you read the detailed description provided in my initial article written after I was fortunate enough to be introduced to the name at the LD Micro Main Event in December 2019.

Update From Q4 2019 Earnings Report And Conference Call

As I expected, INFU blew past its own FY 2019 targets of $79M in revenue and $17.5M in adjusted EBITDA. For its FY 2019 print, INFU posted $81.1M revenue and $18.2M in adjusted EBITDA. These numbers represented a 20.8% increase in revenue and even more impressive 32.4% increase in adjusted EBITDA from the prior year. Moreover, in Q4 2019, management nearly hit its longer-term target of 25% adjusted EBITDA margin, coming in at 24.9%. This expanded EBITDA margin (note it was 22.5% for the year) in Q4 shows the strength of INFU’s operating leverage that I highlighted in my initial article linked above.

While INFU understandably shied away from reiterating its previously stated targets of $89M+ in revenue and $22M+ in adjusted EBITDA for FY 2020 due to the uncertainty of the coronavirus, its intermediate-to-longer-term story remains unchanged. Specifically, INFU has now become a growth story akin to a SaaS model. That is to say the company now has the infrastructure in place with its ITS platform to ramp sales while dropping considerable adjusted EBITDA and cash flow to the bottom line. To understand this impact, simply take a look at the chart below (2019 actual; 2020 targets).

INFU LeverageAs you can see from the chart, INFU’s targets prior to the Covid-19 uncertainty (which I will discuss in depth below) tell the story. 48% of its increased revenue was expected to drop to adjusted EBITDA, with an impressive 33% of that same revenue expected to drop to Cash Flow From Operations. Again, this highlights the fact that INFU’s ITS platform enables it to operate similarly to a SaaS model. As the company continues to grow rapidly on the ITS side, its operating leverage will result in outsized gains to the bottom line.

Before turning to INFU’s new partnership with Cardinal Health that should lead to robust growth, I want to highlight two points from its Q4 call that bode well for INFU as the entire globe faces uncertainty from Covid-19.

(1) INFU CEO Rich Dilorio indicated on the Q4 2019 conference call that disruptions due to Covid-19 have thus far been “minimal.” While underscoring the uncertainty of the future, Dilorio noted two important points:

  • “Our DME services platform, and particularly the direct rental business, generally sees increased customer demand during years with higher than normal flu conditions.” In the Q&A, I asked Dilorio if this dynamic might possibly provide financial benefit to INFU during the Covid-19 pandemic. Dilorio responded: “So, we have seen a little bit of that already kicked in as hospitals and states and local agencies start to gear-up for what may happen. So, we definitely see some upside there. I don’t think it’s multiple millions of dollars, but there is definitely some upside there.
  • Asked by an analyst to comment beyond his prepared remarks on the Covid-19 impact to INFU, Dilorio said: “So far, we’ve seen no disruption to our business. We haven’t seen the lack of patients or customers closing. Quarter-to-date, we’re right on track from where we — what we thought we would do. So, as of yesterday, March 18th, everything was going according to plan.

(2) According to CEO Dilorio, INFU should see continued benefit in 2020 from the exit last year of its sole direct competitor in oncology. This market change led to a significant increase in 2019 revenue for INFU, and appears to provide additional upside in 2020. Dilorio stated: “There’s still some customers and some market share that we’re going to gain this year, without a doubt. And there’s also a lot of customers that although we had them sign on at the end of last year, the revenue really doesn’t come in until later. So, we should see that revenue coming in into 2020, in addition to the market share gains that we believe we will still get.

In short, as of the March 19 conference call, INFU’s business was on track to meet or exceed its previously stated 2020 FY targets. While some disruptions will likely occur – and I will discuss these in the “Covid-19 & Risks” section below – the fundamental, underlying business remains robust. Coupled with the new partnership with Cardinal, INFU remains poised to grow both its top and bottom lines at an impressive rate in 2020.

Cardinal Health Partnership And Future Pipeline

On February 11, INFU formally announced its entrance into the negative pressure wound therapy market via a partnership with “a Top-10 healthcare services company.” On the Q4 2019 call, INFU actually named the partner as Cardinal Health, a $145-billion annual revenue distributor of healthcare products and services.

Cardinal Health

On the call, CEO Dilorio reminded investors that “Cardinal came to [INFU]. As good and great as they are in all things that they do, this clinic to the patient’s home is really a difficult thing to manage.” This new partnership is a huge opportunity for INFU, for numerous reasons.

First, the addressable annual market in home healthcare with CAH’s negative wound pressure therapy, according to CEO Dilorio, is $600 million. As he pointed out, “It doesn’t take a big percentage of the market to really change things for [INFU] from a revenue perspective. 5% (of the addressable market) is an additional $30 million in revenue for an $80 million Company. It’s significant.”

Second, in response to a question I asked on the call, Dilorio confirmed there is “low hanging fruit” with CAH in terms of winning some early business. Dilorio: “It’s still kind of early, but what we see so far is that [we are] winning accounts. And we put our first patient on actually last week. So, we’re starting to onboard more and more patients every day. We’re seeing some success from a competitive standpoint in the market.” And later: “Yes, we’re getting patients on pretty quick because of the low-hanging fruit.” In short, INFU is already starting to see some benefit from this new partnership with CAH.

In addition to the above positive signs, CEO Dilorio confirmed in response to one of my questions on the Q4 2019 call that INFU has plans to leverage this partnership with CAH for additional business beyond negative wound pressure therapy. He further noted that the ITS platform can be leveraged with other possible healthcare partners. Here is Dilorio: “We right now are exploring multiple opportunities to layer in additional therapies in the either platform, DME or ITS—whether it’s through a partnership, an acquisition, there’s all kinds of different options out there. We would love to partner with Cardinal or any company of their size and stature for sure. But there’s multiple options out there for us. And if it happens to be Cardinal, that’s fantastic. If it’s somebody else, then we’re going to make that decision based off of where we can gain leverage.”

Leverage

Clearly, in the conference call discussion of the new partnership with CAH, three important points emerged:

  1. In the current partnership, which is narrowly focused on the negative wound pressure therapy market, the addressable opportunity for INFU is a possible “game changer” for the company, one that could conceivably lead to a nearly 50% growth in revenue (see the chart above indicating about half of that would likely then drop to EBITDA).
  2. INFU is already aggressively attacking that market and quickly picking up some market share.
  3. INFU is not finished: the company continues to look for opportunities to expand and grow its business, leveraging its expertise, most especially on the ITS side of the business.

I will conclude by noting that CEO Dilorio confirmed that INFU’s previously-stated targets for 2020 revenue, adjusted EBITDA, and cash flow from operations included none of this new business. Granted, he pointed out that the real material impact to these numbers will not be seen until 2021 and beyond, but investors should understand that this new partnership will undoubtedly help to offset any negative, temporary impact INFU might see due to Covid-19.

Covid-19 And Risks

We cannot discuss a company in the healthcare industry (or virtually any industry, for that matter!) today without mentioning Covid-19 and its possible impact.

Covid-19

Above, I pointed out that INFU could see additional revenue on its DME side due to the pandemic. CEO Dilorio affirmed this was possible, and that INFU has already seen some of that, but that the impact would not be “in the multiple millions.”

On the other hand, there is the distinct possibility that INFU could see some disruption in business on its ITS side. My primary concern here would be with the pain management business. A significant portion of that business comes from post-surgery pain issues. Given that many hospitals throughout the country are temporarily halting “elective” surgeries, INFU’s pain business is likely to be negatively impacted. However, it should be noted that pain management is still only a small part of INFU’s ITS business, which now has three total therapies – oncology, pain, and wound therapy.

Oncology is the major contributor in ITS, and this too, could be negatively impacted by Covid-19 due to the halt on “elective” procedures. Clearly, though, any pause in oncology treatments – if it happens – is likely only on a short-term basis, as they are potentially “life-saving” and not “elective” in nature. In fact, it seems in only the most severe Covid-19 hotspots would doctors even consider stopping oncology treatments, and again, only for a short time.

In addition to the established ITS business in oncology and pain management, it is possible, perhaps likely, that INFU’s rollout of negative wound pressure therapy with CAH will be slowed down by Covid-19. The only certainty we have right now with Covid-19 is uncertainty, and that is part of why INFU has dropped over 50% since the pandemic concerns began (in my opinion, offering investors an incredible second chance to scoop up INFU shares at a cheap valuation!).

Second Chance

In any case, the company could be negatively impacted by the Covid-19 pandemic, and this is clearly why INFU management did not re-state its prior 2020 financial targets. Still, it did note that as of March 18, its business had not been financially disrupted. In addition, it confirmed it has already started to win negative wound pressure therapy business, which should help to offset any negative, temporary impacts on the pain management or oncology side. In the long term, people will unfortunately continue to have cancer and the need to manage post-surgical pain, so these possible temporary setbacks will eventually subside, and INFU will flourish.

Valuation

For valuation purposes, I am using INFU’s previously stated targets for 2020 of $89M+ revenue, $22M+ adjusted EBITDA, and $16.5M in cash flow from operations. Although INFU did not re-state those targets due to Covid-19 uncertainty, I continue to use them for the following reasons:

  1. INFU has begun winning new business with the CAH partnership, and none of that was included in the previous targets.
  2. Any material impact due to Covid-19 will be temporary for the reasons I stated above; namely that people will continue to have cancer and pain issues.
  3. INFU’s current management has been wisely conservative with its targets and has never missed them.
  4. INFU’s CFO Barry Steele noted on the Q4 2019 call (InfuSystem Holdings, Inc. (INFU) CEO Rich Dilorio on Q4 2019 Results – Earnings Call Transcript) that INFU has total available liquidity of $20.9M, meaning it is unlikely INFU will need to tap into the equity market to weather the Covid-19 storm.

Given the $22M+ estimate for 2020 adjusted EBITDA, as of this writing, INFU is trading at a mere 6x EBITDA. That is an insanely low valuation for most companies, let alone a company that is materially and significantly growing, with even further room and plans to expand its business, as outlined above. This 6x EBITDA valuation gives INFU the distinct possibility to double in value once the Covid-19 concerns begin to subside and/or INFU continues to report solid results regardless.

Finally, investors should not underestimate the tailwind created by INFU’s almost certain inclusion in the Russell 2000 index. Currently, INFU is about 15% above the market cap required for Russell 2000 inclusion, even after the 50% haircut to the stock price. Since the INFU Q4 2019 earnings release, shares have stabilized and even increased in value, hopefully providing a floor for the stock. Even if the stock decreases in value from here, it will likely be following the movement in the market, which simultaneously lowers the market cap required for Russell 2000 inclusion. For those unfamiliar with this phenomenon, the reason INFU shares may benefit from a Russell 2000 addition is that institutions tracking this index would be forced to buy INFU upon inclusion (and would likely start acquiring a month or two in advance). The fact that INFU is a thinly-traded stock will only increase this positive impact.

Conclusion

INFU has transitioned to a growth company, especially with its high-margin ITS business. With plenty of liquidity and a business that will not fail even if the company is negatively impacted by Covid-19, INFU is massively undervalued while trading at 6x prior-stated 2020 EBITDA targets. Add to this the fact that INFU has the tailwind of a probable addition to the Russell 2000 index. The “negative pressure” on INFU shares due to Covid-19 will likely reverse as the company wins market share in its new negative wound therapy business and continues to execute on its business plan. I believe INFU shares could easily double to the $12-13 range within the next 12 months, making INFU a worthy investment for microcap investors.

Disclosure: I am/we are long INFU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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