excluding non-op income (which they include), EBIT margin has declined from 5.6% in Q123 to 4.6% Q124 and most recently 2.4%. Gross margin decline is a function of staffing biz growth but they repeatedly said in the past that high 50s should be where it settles and then they print 56%. like the mgmt team but there's a reason why the stock has derated as much as it has.
Came here to say basically this. Mgmt has talked for years about operating leverage but only the reverse has happened. Operating margin only on a downward trend for years. Mgmt compensation also seems wild for a co this size.
I am not sure that they have said there was much operating leverage. I think they have said that 25% was the upper end of the range for EBITDA margins. Especially as they transition away from vents. The incremental business may not have the same margin, but requires less capital. At least that's the theory.
The opportunistic refresh of their fleet will only increase depreciation in the near term as well. So EBIT margins look like they stay here or trend lower for a bit.
As for compensation, I come from a middle class blue collar house so pretty much everything seems like pretty crazy. The CEO salary isn't fair to me. I think where they fall short is the focus on EBITDA without another qualifier like per share or ROIC or something like that. At least that's my opinion.
Thanks for the comments. I'm not sure EBIT is much better than EBITDA for this biz. I like to use CFFO with being mindful of working capital and capex. But that's just me.
The staffing biz went from nothing to 10% of revenue is a short period. I really don't care if gross margins land at 55 vs 58 if the per share numbers keep growing.
You feel the gross margin number is the reason for the multiple sitting where it is?
agree on the GM comment and further, if you break out the GP of the non-staffing businesses, the GM has been stable between 63-64% (using GMs that mgmt provided). I've told them that they need to call that out more explicitly because then it screens like a deteriorating mgn DME company. I think what's been causing the multiple compression is the declining EBITDA mgn and declining ROIC. Both I think are on the upswing in addition to FCF. FCF should be ~$20M this year pre-acquisition. ~8% FCF that can grow 10% per annum for the next few years should work out well.
Yeah that all makes sense. I would appreciate the additional disclosure and I'm sure analysts would as well.
The heavier capex due to them accelerating their fleet change out with Phillips isn't helping ROIC and now they will layer on Lehan's before it shows in the financials. It definitely doesn't screen as well as I give it credit for. Having said that, looking forward I am optimistic.
Great summary but I’m actually getting a bit discomfortable with the fact that they are stepping out of their “circle” into all this different ventures, sure it’s still all DME and HME but still .. I need to think more about this…
They have worked to diversify away from vents which is where the largest risk of competitive bidding is. They have yet to disappoint with an acquisition that is non-vent so I'm not worried. They have also started the staffing business from nothing and now it's 10% of revenue.
EBITDA beat a bit misleading as they included the gain from vent sales and stock based comp also took a large y/y jump
This is true. It's a crude metric at best.
excluding non-op income (which they include), EBIT margin has declined from 5.6% in Q123 to 4.6% Q124 and most recently 2.4%. Gross margin decline is a function of staffing biz growth but they repeatedly said in the past that high 50s should be where it settles and then they print 56%. like the mgmt team but there's a reason why the stock has derated as much as it has.
Came here to say basically this. Mgmt has talked for years about operating leverage but only the reverse has happened. Operating margin only on a downward trend for years. Mgmt compensation also seems wild for a co this size.
I appreciate the comment.
I am not sure that they have said there was much operating leverage. I think they have said that 25% was the upper end of the range for EBITDA margins. Especially as they transition away from vents. The incremental business may not have the same margin, but requires less capital. At least that's the theory.
The opportunistic refresh of their fleet will only increase depreciation in the near term as well. So EBIT margins look like they stay here or trend lower for a bit.
As for compensation, I come from a middle class blue collar house so pretty much everything seems like pretty crazy. The CEO salary isn't fair to me. I think where they fall short is the focus on EBITDA without another qualifier like per share or ROIC or something like that. At least that's my opinion.
Thanks for commenting regardless.
Thanks for the comments. I'm not sure EBIT is much better than EBITDA for this biz. I like to use CFFO with being mindful of working capital and capex. But that's just me.
The staffing biz went from nothing to 10% of revenue is a short period. I really don't care if gross margins land at 55 vs 58 if the per share numbers keep growing.
You feel the gross margin number is the reason for the multiple sitting where it is?
agree on the GM comment and further, if you break out the GP of the non-staffing businesses, the GM has been stable between 63-64% (using GMs that mgmt provided). I've told them that they need to call that out more explicitly because then it screens like a deteriorating mgn DME company. I think what's been causing the multiple compression is the declining EBITDA mgn and declining ROIC. Both I think are on the upswing in addition to FCF. FCF should be ~$20M this year pre-acquisition. ~8% FCF that can grow 10% per annum for the next few years should work out well.
Yeah that all makes sense. I would appreciate the additional disclosure and I'm sure analysts would as well.
The heavier capex due to them accelerating their fleet change out with Phillips isn't helping ROIC and now they will layer on Lehan's before it shows in the financials. It definitely doesn't screen as well as I give it credit for. Having said that, looking forward I am optimistic.
Thanks again for commenting.
Great summary but I’m actually getting a bit discomfortable with the fact that they are stepping out of their “circle” into all this different ventures, sure it’s still all DME and HME but still .. I need to think more about this…
That's a fair concern.
They have worked to diversify away from vents which is where the largest risk of competitive bidding is. They have yet to disappoint with an acquisition that is non-vent so I'm not worried. They have also started the staffing business from nothing and now it's 10% of revenue.