Monday, December 8, 1997
Horizon Pharmacies, Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HZP)") else Response.Write("(AMEX: HZP)") end if %>
Phone: 972-736-2424
Website:
http://www.horizonrx.com
Price (12/5/97): $11 7/8
HOW DID IT DOUBLE?
The sun never sets on this Horizon without the stock price rising. Or so
it seems. Shares of this drug store chain have quadrupled since its initial
public offering at a split-adjusted $3.33 a share in July.
Horizon is actually executing its stated strategy of gobbling up independently
owned stores and improving profits partly by changing their sales mix. Third
quarter results reported Nov. 14 showed sales up 93% while same-store sales
increased 13.2%. Backing out one-time charges, profits tripled and earnings
per share jumped 50% to $0.04 (split adjusted).
Investors have piled on for part of the action. After raising $5.5 million
in July, Horizon hustled up another $4.3 million in a private placement in
October that went at twice the IPO price. Follow-up stock offerings often
worry investors. In this case, the offering increased shareholders' confidence
since it provided cash for even more deal making.
BUSINESS DESCRIPTION
Based in Princeton, Texas, Horizon was founded in 1994 as a vehicle for acquiring
and consolidating a chain of retail pharmacies primarily located in towns
with populations of fewer than 50,000. The company has grown rapidly to 23
stores, mainly in the West and Midwest, with nine pharmacies purchased since
its July IPO. The firm plans to purchase eight to twelve pharmacies annually.
Horizon's strategy is to maintain the individualized feel and customer service
features of the pharmacies it buys while enhancing profitability through
greater use of technology and access to more competitively priced inventories.
The company also hopes to expand its higher-margin home healthcare and
non-pharmaceutical sales and services while becoming less dependent on
prescription drugs, which account for 80% of sales. A model for the future
is its Farmington, New Mexico store, which sells and leases medical equipment
and offers home healthcare services such as IV infusion and home oxygen therapy.
Insiders own about 25% of the company. The stock recently split 3-for-2.
FINANCIAL FACTS
Income Statement*
9-month sales: $24.5 million
9-month income: $0.43 million
9-month EPS: $0.19
Profit Margin: 1.8%
Market Cap: $52.6 million (Based on 4.43 million shares)
(*Pro forma for first nine months of FY97 as adjusted for the split and
acquisitions. EPS excludes one-time tax charge of 4 cents per share.)
Balance Sheet*
Cash: $1.3 million
Current Assets: $10.9 million
Current Liabilities: $3.6 million
Long-term Debt: $2.6 million
(*As of Sept. 30, 1997. Does not account for $4.3 million raised in an October
private placement or recent acquisitions.)
Ratios
Price-to-earnings: N/A
Price-to-sales: N/A
HOW COULD YOU HAVE FOUND THIS DOUBLE?
When investors think an industry consolidator has the wherewithal to
make the businesses it buys more profitable, they may bid up the consolidator's
stock, allowing it to use its pricey shares to acquire other companies on
the cheap. For this magic to occur, investors must believe the story.
Horizon didn't appear to inspire that willing suspension of disbelief. It
was small. Plus, lead underwriter Capital West lacked experience. Even after
the stock's strong start, the company seemed constrained by its small acquisition
war chest. Then one had to wonder about valuation. This double would have
been hard to predict.
WHERE TO FROM HERE?
The lone earnings estimate offered by First Call doesn't make any sense aside
from the aggressive 75% growth projected for next year. So we're on our
own.
Horizon is a moving target, but its pro forma income shows 1.8% profit margins.
That compares to projected margins for this year of about 2.5% to 2.8% for
drug store giants like CVS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVS)") else Response.Write("(NYSE: CVS)") end if %> and Rite-Aid <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAD)") else Response.Write("(NYSE: RAD)") end if %>. Each is far less dependent on prescription drugs sales than is Horizon.
Both of these behemoths have also adopted a consolidation strategy that has
sent their own stock prices soaring so that they now trade at an enterprise
value slightly below this year's sales. Even assuming a gangbuster fourth
quarter gets added to the three new acquisitions already announced (good
for $5.7 million in annual sales), Horizon is far more richly valued, likely
sporting an enterprise value well over this year's pro forma sales.
Chair/CEO Rick McCord has said the company likes doing deals that are about
50% seller-financed (at 8% to 8.5% interest), with the difference split between
cash and stock. The company has $5.3 million in available cash, or $7.8 million
if all options and warrants are exercised. So Horizon will likely see its
shopping constrained by debt well before it runs low on cash.
The key is the price of its acquisitions. In four recent deals, Horizon added
about $7.2 million in annual sales for just $1.3 million in cash, debt, and
stock. That means Horizon paid 0.18 times sales for these pharmacies while
its own stock sells for maybe 6 times that amount. On this basis, this drug
store chain would appear to have a better chance of becoming a Trouble than
a Double in the next year unless it can markedly improve profits.
Yet, the stock is trading on the assumption that Horizon can buy more sales
over the next year, making this enterprise value-to-sales disparity less
outrageous. As long as investors believe that story (and thus keep the stock
price high enough to do another offering and then another), this Horizon
might just keep expanding.
Still, even if financing doesn't get in the way, the industry titans might.
Then there's Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>, which is making its own drive to
claim a bigger chunk of small-town America's pharmaceutical sales.
-- Louis Corrigan
([email protected])
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