Take a Pass on ExamWorks

 | Mar 06, 2013 | 1:30 PM EST  | Comments
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Richard Perlman, the executive chairman of ExamWorks (EXAM), bought more than 14,000 shares of the company's stock in early March through his Roth IRA, at prices between $14 and $14.50 per share.

ExamWorks provides independent medical examinations (used by customers to verify insurance claims) and reviews of patient medical records and medical bills. A rally on March 4 brought the stock price above $15, and the stock is now up 7% year to date. The share price had barely budged after the company's late-February quarterly report in which it beat analyst expectations, and perhaps Perlman took this as an opportunity to invest in the company. Insider purchases are generally regarded as bullish signals, because the benefits of diversification make insider purchases irrational unless the insider is particularly confident in the company.

ExamWorks' annual report shows that revenue, which had more than doubled in 2011, increased 31% in 2012. In fact, the absolute increase in revenue was about the same. Net losses have actually increased over the last two years, reaching $0.44 per share for 2012, as gross margins have actually fallen and growth and operating costs have increased dramatically. Cash flow from operations is positive, thanks to depreciation, but the company reported only about $25 million in cash flow last year.

The stock has a market capitalization of $520 million (on average, more than 150,000 shares are traded daily, so daily dollar volume is over $2 million), and when we add in ExamWorks' debt and look at EBITDA, we get a trailing enterprise-value-to-EBITDA multiple of 14x.

So it is difficult to call ExamWorks a good value in terms of its historical performance, and in recent years the company has not improved its earnings as revenue has risen. In fact, in the last two years, even revenue growth seems to be slowing, and as we've noted, gross margins have been coming in lower. These data cover only a short period, but these are not good trends.

The sell side expects losses per share to improve to $0.33 a share this year, and then to $0.06 in 2014. In addition, although the stock has not done particularly well in the last couple of months, it has risen 43% in the last year as the market has become more confident. However, the most recent data show that 15% of the outstanding shares are held short as bears seize upon similar logic to what we've used here to determine that ExamWorks is actually overvalued. It's also worth noting that the stock's beta is 2.1.

The company did improve its performance a bit in the fourth quarter of 2012. Losses per share were about half of what they were a year earlier and were in fact lower than they had been in any of the previous four quarters. Sales growth for the quarter did fall to 21% -- note that this is lower than the figure for the full year, suggesting that growth is in fact decelerating. But we believe that improving the bottom line is more important than top-line growth at this point.

Still, ExamWorks is too speculative for us to recommend buying. It would be rare for us to approve of an unprofitable company at all, and when we do look at stocks of companies that have negative earnings, some of the biggest red flags we look for are falling sales growth rates, a poor valuation in terms of cash flow and an inability to move itself closer to profitability. With the exception of a reduction in losses last quarter (and we wouldn't be convinced that one quarter of good results is not an isolated event), ExamWorks does not do well on those terms. The short trade may be too crowded for a stock with such a small market cap, so for now we would advise avoiding the company even in light of the insider purchase.

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