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June 15, 1999
Horizon Pharmacies for Dad
Trading at $5 1/4 as of June 14, 1999
I first came across a little company called Horizon Pharmacies <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HZP)") else Response.Write("(AMEX: HZP)") end if %> while covering retail stocks for a news service a few years back. It was a bit on the smallish side for our radar at the time, but something about it caught our attention: It was announcing acquisitions like TMF Gump gobbles peanut butter M&M's, seemingly on a daily basis. Next -- Dial Corp from TMFValue
* A Stock for Dad represents the opinion of one Fool and in no way should be taken as the opinion of either The Motley Fool, Inc., the company in question, or representative of anyone or anything else other than that specific Fool's thoughts.
by Dave Marino-Nachison ([email protected])
Finally I decided enough was enough and started poking around. What I found was a pretty interesting company -- a chain that makes its living buying well-established mom-and-pop pharmacies in small towns and adding them to its distribution network to boost profitability. At the time, I wasn't allowed to invest in retail stocks, but nowadays I'm free to consider away and this seems like the perfect time to do so -- particularly if it benefits dear old Dad.
The stock isn't particularly volatile, but it climbed steadily to nearly $15 -- a triple in its first year of public trading -- before turning tail last summer. Since then, it's moved back down to the $6 range, where it idled as of this writing. What happened? The shares were cruising along around $10-$12 for several months before getting crushed in late February on news that a technical problem meant Horizon wasn't getting updated drug pricing information in late 1998. Customers were widely undercharged, butchering profits.
But if Horizon has fixed the technical issues, as it claims, then investors' focus can return to the company's business model: buying and integrating drugstores in small communities, then bolstering their profitability with the advertising, purchasing, and logistical power of a chain.
Horizon bought 6 pharmacies (or related businesses) in 1996, 14 in 1997, and 21 in 1998. Predictably, revenues have skyrocketed, boasting a compound annual growth rate of more than 128% over the past three years. As of this month, the company owned 50 pharmacies in 16 states, plus a handful of home medical equipment companies, institutional pharmacies, and other related business that don't make up a big portion of sales.
The stock now trades for approximately 50% of full-year 1998 sales -- a far cry from a year ago, when investors were paying more than 2.5 times sales for Horizon shares. Given Horizon's current stock price, its most recent deals appear pretty reasonable. The four acquisitions made in Q1 cost the company about $4 million, approximately 30% of projected sales for the new stores. When the Fool featured the company as a Daily Double in late 1997, it was paying somewhat less for new sales -- but investors were also paying more than twice as much for Horizon shares.
The question, then, becomes the quality of Horizon's new sales. Horizon is willing to spend money improving its stores, crucial since the "front-end" of a pharmacy -- and its component toys, magazines, chips, and candy -- is generally more profitable than the long white table where the pharmacist sits.
With that in mind, the company is moving its 2,000-square-foot store in 35,000-resident McKinney, Texas, into a 9,000-square-foot site complete with an old-fashioned soda fountain, True Value Hardware, one-hour photo service, and a U.S. Postal Service center.
This approach has paid off in recent years. Prescription drug sales as a percentage of total revenues have fallen in each of the last three years, from 80% in 1996 to 76% and 74% in 1997 and 1998, respectively. It's a good thing, too, since gross margins on prescription drugs have fallen in recent years as the increase in usage of third-party drug payment programs by consumers has meant falling prices for pharmacies.
But even with that phenomenon rearing its head, Horizon has been increasingly profitable of late. Gross margins improved from 30% to nearly 33% between 1995 and 1997 -- with 1998's 27% an aberration caused by the aforementioned pricing problems. This was exacerbated in the financial results, since Q4 is traditionally the year's biggest sales period -- 1998 was no exception, as revenues for the quarter made up more than 34% of the year's total sales.
Horizon's sales outlook got a boost on June 3 when the company announced the purchase of Canton, Ohio's Fulton Drug, which it described as an "e-tail/mail order/Internet pharmacy." Fulton, which operates the StarkScripts pharmacy website, is seen as a means to jump-start Horizon's move online.
The plan is to accelerate the pace: Horizon wants to buy between 15 and 40 new retail pharmacies -- and between 5 and 10 home medical-equipment operations in both 1999 and 2000.
That sort of range, of course, leaves some uncertainty as to the outlook for earnings, although the one analyst currently following the stock is looking for EPS of $0.18 in 1999 and $0.28 in 2000. Still, with the Q4 disaster requiring the company to temporarily suspend acquisitions -- it has since restarted its shopping spree -- investors might want to watch Horizon closely for the next quarter or two to see how the new acquisition pace will impact revenues.
If it turns out that the company can recover from a damaging winter quarter and resume business as usual, now may be a good time for investors to begin evaluating Horizon's chances of returning to share price growth -- along with store count and revenue growth. Someone has already taken notice: Gintel Asset Management boosted its stake in the company to more than 18% with a 976,000-share purchase on May 11, when the stock closed at $7 1/4 per stub.
And with the company's shares looking fairly depressed given their past performance, now appears to be a fine time for investors to begin looking toward the Horizon again.
Horizon Pharmacies Information:
Trades on AMEX under symbol HZP
Horizon Pharmacies's website: www.horizonrx.com
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