Originally Posted by SkinnyGoomba
Anyone have any experience with FWM, Fairway market?
Why does FWM interest you?
I just opened a position in PRSC.
PRSC - Providence Service Corp
PRSC is a company that has been growing at a great pace but has been mismanaged/misguided over the years by a distracted (ousted as of 6 months ago) CEO. The new management team is in place now.
PRSC operates in two segments; government sponsored social services and non-emergency transportation (NET). The first business is their legacy business and only accounts for 30% (dropping every quarter) of revenue. The second (NET) business is contract-based and won at the state or county level to give medicare/Medicaid patients rides to their appointments. This saves the state money since a private company does it cheaper..so it shouldn't be affected by budget cuts. The NET operations started in 2007 and has won tons of new contracts, which were purchased with debt ($150M peak) and almost led to bankruptcy in 2008/2009. Current debt is at $90M.
The social services business has been holding its own and the NET business has been winning tons of new contracts and growing quickly, but margins have suffered. Revenues have grown from 691mm in 2008 to an expected 1.1 billion in 2012, almost entirely from NET. NET keeps winning new contracts from aggressive bids, but initiating these contracts entails expensive startup costs. As well, 3 contracts in 2012 were poorly bid. PRSC bids on a contract and gets paid based on the number of people in the geographic area. So if more people use the service in that area than they expected, they don't get extra compensation. For example, snow storms are actually good for them because people cancel their appointments and stay home (big reason why Q12012 was so weak vs 2011). So in those 3 contracts, operation rates came in much higher than management had modeled, ruining the profitability of the entire company. Which their financials support. Management has said they aim for a company-wide ebitda margin of 6.5%. From 2008-2010 they managed to surpass this, delivering margins of 6.5%, 8.3%, and 8.3%. However, in 2011 the problems started and they only achieved a 6.2% ebitda margin. This year looks to come in below 5%. That's a terrible margin obviously.
The former CEO of the company, Fletcher McCuster is the founder of PRSC. He did a decent job growing the company but wasn't ready to take on the NET business, and didn't build a team that knew either.
Now starts the most significant selling point..the reason to buy. In summer of 2012 a hedge fund, Coliseum Capital, bought a 7% stake in the company. CC does what lots of other hedge funds do..buy a stake large enough to get their voice heard, then push for change and ultimately a sale. This same strategy was implemented in 2009 with Rural/Metro RURL. RURL is also in the NET business. In 2009 CC bought a small stake in RURL. 2010 CC bought more shares and increased their position. Late 2010 the RURL CEO was fired and replaced with a CC managing partner. Debt was renegotiated from 13% to 6% and margins were improved. Early 2011 RURL sold to a private equity firm for $17, or 9x ebitda. The initial shares were bought at $4 with purchases as high as $7.50.
Now stop me when this sounds familiar. CC bought their initial stake in PRSC in early 2012 around $14. A managing partner of CC became a director of PRSC in June. In mid 2012 the PRSC share price dropped and CC bought more and now owns 16% of the company. Late 2012 the CEO/CFO "retired" (bahaha). A lead director has taken over as interim CEO and the former director from rural/metro has become the new CFO. CC also bought an extra 100k shares soon after the management change around $12.50.
It's obvious what CC's strategy is and what will happen next. It's actually already happening. The conference call of Q32012 the exec in charge of NET said they're primary focus is on those 3 bad contracts killing their bottom line. The first was renegotiated to a higher rate. The second was terminated altogether. The third was still being reworked. It's clear they're emphasizing higher margins. The old goal of 6.5% margins is easily within reach. When RURL sold it had 10% margins, so that's the goal imo
If we assume revenues of $1.1B and margins of 6.5% we get ebitda of $71.5M. RURL sold for 9x in 2011. Another NET business, EMS, sold to a PE firm for 10x in 2010. If we give PRSC 8x, that equates to a $570M EV. Take off the debt which should be down to 60M by the end of 2013 and the market cap of equity is $510mm. 13M shares outstanding and you have $39 a share. The stock is currently trading at $18.50