A 13G filed with the Securities and Exchange Commission has disclosed that Steelhead Partners, a hedge fund managed by Michael Johnston, owns a combination of shares and convertible notes equivalent to about 690,000 shares of stock in Providence Service Corp. (PRSC), a $350 million market cap company that manages government-funded counseling and transportation services.
On average, more than 90,000 shares of Providence Service are traded per day, and since it trades at nearly $27, the stock has well over $2 million of daily dollar volume. Steelhead's position, if fully converted, would represent 5% of the total shares outstanding. Providence appointed Warren Rustand, who had been serving as the company's interim CEO, to the permanent CEO position in May of this year.
Most of Providence Service's revenue, and the substantial majority of its operating income (according to recent reports), comes from its non-emergency medical transportation services. The primary users of this service are members of Medicare and Medicaid programs. In the first quarter of 2013, this segment experienced a 17% increase in revenue from a year earlier, while the social services business actually saw a decline in sales.
The strength of the transportation business, then, powered an overall 8% rise on the top line from a year ago and a more than doubling in net income and earnings per share. Cash flow from operations was up strongly as well, and since Providence Service requires very little investment, nearly all of that it was added to the company's cash account.
The stock price has roughly doubled in the last year, and Providence Service currently trades at 29x trailing earnings. However, that figure doesn't account for the significant improvement in the company's financials over the last few quarters: If we annualize the first quarter of this year, we get a price-to-earnings multiple of only 14 (though management does refer to the operations as somewhat seasonal, and last year's first quarter does seem to have been one of the better quarters of 2012).
Still, investors should be aware that the trailing P/E may be quite misleading here as well. Wall Street analysts are expecting a correction in the company's income but expect that 2014 numbers will still be well above the trailing figures. Their consensus forecasts imply a forward P/E of 16.
The growth in the company's transportation business seems to have been led by new contracts for its services, so that segment should be able to maintain its current financial performance, less any seasonal factors. In fact, Providence Service's ability to grow that segment through managing a larger number of contracts suggests that it has further growth opportunities there, and given that the company has managed to hold down cost growth enough for much of this additional revenue to become earnings, we believe that portion of the company looks positive.
In addition, Medicare and Medicaid are likely to cover a larger number of patients, potentially increasing demand for the company's services. We would be concerned about the social services business, but at this point that segment represents a fairly small portion of operating income.
If investors do want to consider Providence Service as a potential "growth at a reasonable price" stock, it might be useful to look at previous quarters in order to approximate what earnings might look like for this full year, given the apparent seasonality of the company. We'd be interested in learning more about the business, in particular the prospects for further sales increases in the transportation segment, as it appears that further strength there could quite likely drop to the bottom line and give Providence Service significant earnings growth and a normalized P/E multiple in the high teens.