Psychiatric Solutions, Inc. (PSYS)
Business Overview from reuters.com and psysolutions.com
Psychiatric Solutions, Inc, (Psychiatric Solutions), founded in 1988, provides inpatient
behavioral healthcare services to ill children, adolescents, and adults. PSYS was originally an
administrator of outpatient services, but after realizing how underserved the inpatient industry
was, the company shifted its focus to inpatient services and began acquiring its first psychiatric
management businesses and freestanding inpatient facilities between 1999 and 2001. By the end
of 2006, the company operated 75 inpatient behavioral healthcare facilities, 19 of which were
acquired in 2006 alone, with over 8,000 beds in 29 states and in Puerto Rico and the US Virgin
Islands. The company continues to grow in 2007 as seen in its recent acquisition of Three Rivers
Behavioral Health and pending acquisition of Horizon Health. In addition to its inpatient
behavioral healthcare facilities division, PSYS also has an inpatient management contract
division through which it manages inpatient facilities for government agencies. Psych Solutions
is a large company relative to its competitors and the industry. It has a market cap of $2.25
billion which is greater than the market caps of its top competitors, Comprehensive Care Corp
(market cap $5.85 million) and Magellan Health Services Inc. (market cap 1.61 $billion) and
greater than the industry (market cap $179.99 million).
Joey A. Jacobs is a co-founder of Psychiatric Solutions and has served as the CEO of the
company since 1997. Before joining PSYS, Jacobs held a variety of leadership positions for
Hospital Corporations of America for 21 years. Jacobs and the rest of Psychiatric Solutions’ top
managers have over the years acquired the experience and expertise needed to aid in the
company’s growth.
Generating 94.8% of its revenue from its inpatient behavioral healthcare facilities division, PSYS
prides itself in being the only company in the US largely focused on inpatient behavioral health
services. Jacobs and the rest of PSYS’ management of Psychiatric Solutions hopes to ultimately
be the top provider of inpatient behavioral health services in the United States.
Competition from hoovers.com and reuters.com
Competitor
Comprehensive Care Corp
(CHCR.OB)
HCA Inc (Private)
Company Description
CHCR.OB provides
behavioral and psychiatric
health services to
corporations, government
organizations, and managed
healthcare providers in about
15 states. It offers its
customers outpatient
programs, intermediate patient
services, and inpatient and
crisis intervention services.
HCA Inc is indisputably the
top “for profit” hospital
Implications for PSYS
Like PSYS, CHCR.OB
specializes in psychiatric
health services. However due
to its weak financial history
and poor performance on the
market, it is currently in the
process of being acquired by
Hythiam for $16 million.
HCA’s more diversified
services and locations
1
operator in the US operating
190 hospitals and 100
ambulatory surgery centers in
the US and 8 hospitals in
Switzerland and the UK.
HCA’s hospitals specialize in
acute care, psychiatric care
and rehabilitation. In 2006,
the company was taken
private.
Magellan Health Services, Inc. MGLN is a healthcare
(MGLN)
management organization that
seeks to provide its members
with health care that is
affordable, high quality,
clinically appropriate and
structured to fit each
individual member’s specific
needs. Magellan is currently
the United States’ leading
diversified health care
management organization
offering its clients services in
behavioral health
management, radiology
benefits management, and
specialty pharmacy.
overseas give it an edge over
PSYS
Magellan provides a wider
variety of services than
Psychiatric Solutions.
Financials from finance.yahoo.com and hoovers.com
Income Statement
From Psychiatric Solutions’ annual income statement we see that the company’s increasing
margins and profits are indicative of its good financial health. As of December 31, 2006, PSYS
had a gross profit of $446.27 million, which is about 37% more than its 2005 gross profit of
$327.1, and a gross margin of 43.5%, which is slightly lower than its 2005 margin of 44.9%.
These figures indicate that Psych Solutions efficiently sells its products and can efficiently
generate high profits in the future. PSYS’ profit margin is at 5.9%, up from 3.7% in 2005,
suggesting that the company is generating high earnings per dollar of sales. Lastly, PSYS has an
operating margin of 13.6%, up from 12.8% in 2005, indicating that the company can run its
business efficiently because of its ability to pay for its fixed costs.
View: Annual Data | Quarterly Data
All numbers in thousands
2
PERIOD ENDiNG
Total Revenue
Cost of Revenue
1,026,490
Gross Profit
Operating Expenses
Research Development
Selling General and
Administrative
Non Recurring
Others
Total Operating Expenses
Operating Income or Loss
1-Dec-06 31-Dec-0531-Dec-04
727,774 487,190
580,223 400,676 350,075
446,267
327,098
137,115
-
-
-
266,367
205,298
63,550
40,205
28,359
20,742
-
-
-
139,695
93,441
52,823
Income from Continuing Operations
Total Other Income/Expenses
Net
Earnings Before Interest And
139,695
Taxes
Interest Expense
40,307
Income Before Tax
99,388
Income Tax Expense
37,507 !
Minority Interest
Net Income From Continuing
Ops
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting Changes
Other Items
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares
61,881
(1,249)
-
(21,871)
(6,407)
71,570
46,416
27,081
44,489
17,140
-
18,964
27,452
10,432
-
27,349
17,020
(195)
-
(219)
-
60,632
-
27,154
-
16,801
(663)
$60,632
$27,154
$16,138
Balance Sheet
Psych Solutions has a current ratio of 1.738 meaning it can finance its short-term liabilities with
the assets it currently has. With a debt-to-equity ratio of 1.18, PSYS is a highly leveraged
company – in an attempt to expand revenues - making the investment slightly risky, but the
company also has a solvency ratio of 1.66 indicating it can survive in the longrun. The company
has a return on equity of 10.60% and a return on assets of 6.90% indicating that its owners are
3
effective at generating returns on their investments and that Jacobs and the rest of PSYS’
management efficiently uses its assets to generate earnings.
Assets
Current Assets
Cash And Cash Equivalents
Short Term Investments
Net Receivables
Inventory
Other Current Assets
18,541
180,137
44,582
54,554
134,323
50,838
33,255
77,539
16,412
Total Current Assets
Long Term Investments
Property Plant and Equipment
Goodwill
Intangible Assets
Accumulated Amortization
Other Assets
Deferred Long Term Asset Charges
243,260
543,806
761,026
700
32,404
-
239,715
378,357
527,655
29,885
-
127,206
218,231
130,079
2,100
20,230
-
1,581,196
1,175,612
497,846
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
137,587
2,386
-
100,542
325
-
39,197
20,764
27,355
Total Current Liabilities
Long Term Debt
Other Liabilities
Deferred Long Term Liability Charges
Minority Interest
Negative Goodwill
139,973
740,921
27,599
44,924
-
100,867
482,064
20,818
32,151
-
87,316
153,572
4,423
8,020
-
Total Liabilities
953,417
635,900
253,331
Stockholders' Equity
Misc Stocks Options Warrants
Redeemable Preferred Stock
Preferred Stock
Common Stock
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholder Equity
534
104,052
523,193
-
524
43,420
495,768
-
205
16,266
228,044
-
Total Stockholder Equity
627,779
539,712
244,515
($133,947)
$12,057
$112,336
Total Assets
Net Tangible Assets
4
Cash Flow
Psych Solutions has a net cash flow from operating activities of $123.71 million, up from $79.8
million in 2005, which indicates the company’s ability to generate positive cash flow from its
operations. It has a net cash flow from investing activities of $419.49 million, which is down
from its 2005 net of $536.4 million which is probably because of its steady stream of health
facility acquisitions. PSYS currently has a net financing cash flow of $259.6 million, which is
about 54% less than its net financing cash flow in 2005 of $477.9 million. This decline might
have occurred because the company might have recently issued bonds.
PERIOD ENDING
Net Income
Operating Activities, Cash Flows Provided By or Used In
Depreciation
Adjustments To Net Income
Changes In Accounts Receivables
Changes In Liabilities
Changes In Inventories
Changes In Other Operating Activities
31-Dec-06
60,632
31-Dec-05
27,154
31-Dec-04
16,801
22,291
49,106
(12,723)
11,937
(7,536)
16,002
45,104
(23,323)
17,800
(2,971)
10,559
24,420
(14,075)
(48)
2,200
Total Cash Flow From Operating Activities
123,707
79,766
39,857
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures
Investments
Other Cashflows from Investing Activities
(33,816)
(385,672)
(21,750)
(1,340)
(513,306)
(17,216)
953
(137,796)
Total Cash Flows From Investing Activities
(419,488)
(536,396)
(154,059)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid
Sale Purchase of Stock
Net Borrowings
Other Cash Flows from Financing Activities
6,309
248,959
4,354
199,022
278,848
-
109,119
(6,616)
-
Total Cash Flows From Financing Activities
Effect Of Exchange Rate Changes
259,622
-
477,870
-
102,503
-
Change In Cash and Cash Equivalents
($36,159)
$21,240
($11,699)
Valuation from reuters.com and finance.yahoo.com
PSYS experienced declining stock prices between May and August of 2006, reaching a 52 week
low of $25.59 on July 26,2006. Since then its stock price has increased to its current price of
about $42 reaching its 52 week high of $42.93 on February 20, 2007. Analysts estimate a mean
5
target price of $47.75 within a range of $43.50 to $58. I believe PSYS stock will reach a price
somewhere between $43 and $45 by the end of 2007 and will reach a price of about $60 by the
end of 2008. Analysts also estimate an annual EPS of about 1.48 by December 2007.
Key
Metric
PE
Ratio
PSYS
35.30
Comparison
to Industry
22.32
Comparison
to S&P 500
20.11
EPS
29.34
16.09
17.76
PEG
1.14
1.37
n/a
Price to
Book
3.43
3.67
3.93
Price to
Sales
2.11
1.99
2.80
Implications for PSYS
PSYS’ PE ratio is high indicating that the
shareholder expects the stock to do well and
is paying a premium for their earnings. This
might be due to the company’s expanded
selection of services and recent acquisitions.
PSYS’ high EPS indicates that the company
is able to generate high earnings for its
stockholders and is very profitable.
The stock is discounted relative to future
earnings growth
The Price to Book ratio is lower than the
industry indicating that PSYS could be
undervalued.
The Price to Sales ratio is higher than the
industry, which could be because the
company is having a difficult time selling its
products due to competitors.
6
Investment Opportunities
Acquisitions
Over the past 5 years, Psychiatric Solutions has acquired multiple inpatient behavioral health
facilities and this stream of acquisitions is steadily rising. As of December 31, 2006 the
company operated some 75 owned or leased behavioral health care facilities. In 2006,
Psychiatric Solutions acquired 19 behavioral healthcare facilities and hopes to continue acquiring
and operating more facilities in the future. In January of 2007, the company acquired Three
Rivers Behavioral Health which is an 86-bed psychiatric facility. Currently the company is in
the process of closing the deal to acquire Horizon Health, a company that operates 15 mental
health hospitals and manages over 100 rehab and mental health programs. Psych Solutions’
management wishes to consolidate the healthcare facilities industry through the continued
acquisition of such single and multi-facility operations.
Organic Growth and Expansion
Currently, Psychiatric Solutions is focusing on consolidating the industry by producing organic
growth within its own facilities. The company hopes to expand its revenues and is trying to
achieve this goal by focusing on intensive marketing in order to promote the facility, expanding
the capacity of its existing programs, and recruiting more behavioral health specialists such as
inpatient psychiatrists.
On March 28, 2007 Psych Solutions won approval to build an 80-bed behavioral hospital in
Williamson County, which is a goal that Senior Health Inc (despite two attempts) failed to
achieve.
Additionally, Psychiatric Solutions has a strong financial record and seems well suited to give
itself the financial strength it needs to grow.
Investment Risks
Some of Psych Solutions’ valuation metrics are cause for concern. It has a PE ratio of 35.30
compared to the industry PE of 22.32. Its high PE ratio shows that at its current stock prices, the
shares appear overvalued in the short term. Additionally, PSYS has a Price to Book ratio of 3.43
compared to the industry’s Price to Book ratio of 3.67. This low ratio suggests that the stock is
overvalued. Psych Solutions could also be at risk of being bought out by a larger company. Its
market cap is high relative to its competitors, but there are still larger companies within the
sector. No talks of such an event have occurred but it is a possibility. As mentioned above,
PSYS is undergone a series of acquisitions and promises to do so for the remainder of 2007. If
its growth is not managed efficiently, the company may be endanger of being unable to keep up
with this expansion.
Investment Recommendation
7
Although the current share price for PSYS (about $42) might seem overvalued, Psychiatric
Solutions, Inc has great potential. The company’s acquisitions and organic growth goals are
great investment opportunities, but it will need to maintain its current financial strength to make
sure it is prepared for its internal and external growth. Furthermore, the current PE ratio and
current stock price are reflections of investors’ high expectations for the stock and so
management will have to manage the company’s growth properly in order to please these
investors. Luckily, PSYS’ highly experienced and efficient management has already proven
itself to be effective at keeping the company in good financial shape and will no doubt keep up
the good work.
The stock price has been consistently improving, changing about 34% over the past 52 weeks.
After reaching its 52 week low of about $30 in July 2006, the stock price grew to its current price
of about $42. Analysts estimate the stock will sell for anywhere from $43 to $58 dollars by the
end of 2007. Based on the fundamentals of the company and its investment opportunities, I find
these estimates to be credible.
Psychiatric Solutions is positioned to do great things in the future for the healthcare facilities
industry. I rate the stock as a BUY at market price and recommend that Smart Woman Securities
invest in the entity.
Full Financial Statements from Google Finance
Income Statement
In Millions of USD
(except for per share
items)
Revenue
Other Revenue, Total
Total Revenue
Cost of Revenue, Total
Gross Profit
Selling/General/Admin.
Expenses, Total
Research & Development
Depreciation/Amortization
Interest Expense(Income) Net Operating
Unusual Expense
(Income)
Other Operating Expenses,
Total
Total Operating
Expense
Operating Income
Interest Income(Expense),
Net Non-Operating
Gain (Loss) on Sale of
Assets
Other, Net
Income Before Tax
3 months
Ending
2006-12-31
280.96
280.96
204.04
76.92
3 months
Ending
2006-09-30
254.81
254.81
186.78
68.03
3 months
Ending
2006-06-30
248.40
248.40
180.13
68.27
3 months
Ending
2006-03-31
242.31
242.31
179.88
62.44
3 months
Ending
2005-12-31
221.11
221.11
161.02
60.09
5.82
4.41
4.59
4.77
3.23
-
-
-
-
-
5.77
5.23
4.87
4.75
4.46
11.77
10.06
9.27
9.21
8.86
0.00
0.00
0.00
0.00
0.00
24.88
23.21
23.95
23.72
21.25
252.28
229.70
222.81
222.31
198.83
28.68
25.11
25.59
20.00
22.28
-
-
-
-
-
-
-
-
-
-
28.68
25.11
25.59
20.00
22.28
8
Income After Tax
Minority Interest
Equity In Affiliates
Net Income Before Extra.
Items
Accounting Change
Discontinued Operations
Extraordinary Item
Net Income
Preferred Dividends
Income Available to
Common Excl. Extra
Items
Income Available to
Common Incl. Extra
Items
Basic Weighted Average
Shares
Basic EPS Excluding
Extraordinary Items
Basic EPS Including
Extraordinary Items
Dilution Adjustment
Diluted Weighted Average
Shares
Diluted EPS Excluding
Extraordinary Items
Diluted EPS Including
Extraordinary Items
Dividends per Share Common Stock Primary
Issue
Gross Dividends Common Stock
Net Income after Stock
Based Comp. Expense
Basic EPS after Stock
Based Comp. Expsense
Diluted EPS after Stock
Based Comp. Expense
Depreciation,
Supplemental
Total Special Items
Normalized Income
Before Taxes
Effect of Special Items on
Income Taxes
Income Taxes Ex. Impact
of Special Items
Normalized Income After
Taxes
Normalized Income Avail
to Common
Basic Normalized EPS
Diluted Normalized EPS
18.04
-
15.57
-
15.87
-
12.40
-
13.80
-
18.04
15.57
15.87
12.40
13.80
17.55
-
15.52
-
15.36
-
12.19
-
13.94
-
18.04
15.57
15.87
12.40
13.80
17.55
15.52
15.36
12.19
13.94
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0.00
0.00
0.00
0.00
0.00
54.44
54.27
54.07
53.89
53.85
0.33
0.29
0.29
0.23
0.26
-
-
-
-
-
0.00
0.00
0.00
0.00
0.00
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
0.33
0.29
0.29
0.23
0.26
9
Balance Sheet
In Millions of USD (except for
per share items)
Cash & Equivalents
Short Term Investments
Cash and Short Term
Investments
Accounts Receivable - Trade,
Net
Receivables - Other
Total Receivables, Net
Total Inventory
Prepaid Expenses
Other Current Assets, Total
Total Current Assets
Property/Plant/Equipment,
Total - Gross
Goodwill, Net
Intangibles, Net
Long Term Investments
Other Long Term Assets, Total
Total Assets
Accounts Payable
Accrued Expenses
Notes Payable/Short Term
Debt
Current Port. of LT
Debt/Capital Leases
Other Current liabilities, Total
Total Current Liabilities
Long Term Debt
Capital Lease Obligations
Total Long Term Debt
Total Debt
Deferred Income Tax
Minority Interest
Other Liabilities, Total
Total Liabilities
Redeemable Preferred Stock,
Total
Preferred Stock - Non
Redeemable, Net
Common Stock, Total
Additional Paid-In Capital
Retained Earnings
(Accumulated Deficit)
Treasury Stock - Common
Other Equity, Total
Total Equity
Total Liabilities &
Shareholders' Equity
Shares Outs - Common Stock
Primary Issue
Total Common Shares
Outstanding
As of
2006-1231
18.54
-
As of
2006-0930
10.46
-
As of
2006-0630
56.45
-
As of
2006-0331
25.66
-
As of
2005-1231
54.70
-
18.54
10.46
56.45
25.66
54.70
180.14
157.26
147.12
146.14
132.29
180.14
44.58
243.26
157.26
41.93
209.66
147.12
48.15
251.72
146.14
52.48
224.28
132.29
52.14
239.13
592.29
-
-
-
407.05
761.03
33.10
1,581.20
25.29
45.85
603.94
27.40
1,317.95
19.14
43.49
548.37
27.49
1,236.87
18.11
37.03
540.61
28.45
1,197.02
16.85
31.71
526.54
31.20
1,175.03
18.73
34.36
0.00
0.00
0.00
0.00
0.00
2.39
0.57
0.36
0.36
0.33
66.44
139.97
740.92
740.92
743.31
44.92
27.60
953.42
52.52
115.72
537.88
537.88
538.45
37.08
23.07
713.74
46.13
101.63
485.81
485.81
486.17
42.54
23.40
653.38
40.95
89.87
485.90
485.90
486.26
36.05
22.95
634.78
46.87
100.29
482.06
482.06
482.39
32.15
20.82
635.32
-
-
-
-
-
-
-
-
-
-
0.53
523.19
0.53
517.18
0.53
511.99
0.53
506.11
0.52
495.77
104.05
86.50
70.97
55.61
43.42
627.78
604.21
583.50
562.25
539.71
1,581.20
1,317.95
1,236.87
1,197.02
1,175.03
-
-
-
-
-
53.42
53.25
53.05
52.75
52.43
10
Cash Flow
In Millions of USD
(except for per
share items)
Net
Income/Starting
Line
Depreciation/Deple
tion
Amortization
Deferred Taxes
Non-Cash Items
Changes in
Working Capital
Cash from
Operating
Activities
Capital
Expenditures
Other Investing
Cash Flow Items,
Total
Cash from
Investing
Activities
Financing Cash
Flow Items
Total Cash
Dividends Paid
Issuance
(Retirement) of
Stock, Net
Issuance
(Retirement) of
Debt, Net
Cash from
Financing
Activities
Foreign Exchange
Effects
Net Change in
Cash
Cash Interest Paid,
Supplemental
Cash Taxes Paid,
Supplemental
3 months
Ending
2006-12-31
3 months
Ending
2006-09-30
3 months
Ending
2006-06-30
3 months
Ending
2006-03-31
17.55
15.52
15.36
12.19
5.77
5.23
4.87
4.75
11.05
3.06
7.99
2.48
12.08
-1.34
4.20
12.96
5.44
-2.43
10.51
-23.55
42.88
28.79
41.48
10.56
-12.94
-7.76
-7.61
-5.51
-218.64
-122.24
-6.73
-38.06
-231.58
-130.00
-14.34
-43.57
46.11
53.46
1.78
2.42
-
-
-
-
0.85
1.86
1.96
1.64
149.81
-0.09
-0.09
-0.09
196.77
55.22
3.65
3.98
-
-
-
-
8.08
-45.99
30.80
-29.04
-
-
-
-
-
-
-
-
11