Yahoo Finance Is CRH Medical Corp. a Valeant Pharmaceuticals Intl Inc. 2.0?
Investors around the world have largely been steering clear of hyper-growth models that have proven to be landmines, and those looking for opportunities to short such companies have been rewarded of late.
As Valeant Pharmaceuticals Intl Inc. (TSX:VRX)(NYSE:VRX) can attest, growing a business primarily through acquisitions, racking up a massive debt load, while stoking investors? growth expectations via engineering ever-faster growing revenues and earnings proved to be a disaster.
Here?s why CRH Medical Corp. (TSX:CRH) is similar in many ways to pre-crash Valeant, and why the 18.5% stock price drop on Friday may have shed some light on potential problems within CRH?s acquisition model. With an earnings report only a few days away, Friday?s sell-off has spooked investors, and rightfully so.
Financial statements don?t tell the whole story
CRH made three acquisitions in 2016 for controlling interests of anesthesia companies with two of the acquisitions for 51% of the targets, and the third acquisition for approximately two-thirds of the business.
Because CRH now owns more than 50% of these companies, it is able to include 100% of the revenues and earnings from these firms on its balance sheet, boosting total earnings substantially while distributing only approximately half of the acquired value to shareholders.
On the bottom of the financial statements, we can see that net income ?attributable to shareholders? was $10.6 million in 2016 and net income ?attributable to non-controlling interests? was $5.5 million, meaning more than a third of the net income produced by CRH in 2016 is not attributable to shareholders of the company.
It is important to differentiate the two; looking at the financial statements from a high-level perspective, the numbers may seem impressive, and the growth rates often stated on press releases or in the media may make investors wonder why they didn?t pick this ?growth gem;? however, the numbers used are clearly artificially inflated by more than one-third, and the overall indebtedness attributable to shareholders is more than one-third higher.
Shareholders who are not careful to take note of the adjustments may be disappointed when they understand that their overall equity as a percentage of the total company is actually shrinking.
The percentage of net income attributable to shareholders has been decreasing at an alarming rate due to the manner in which CRH is completing its acquisitions. As of Q4 2016, over 45% of the company?s quarterly net income was not attributable to shareholders, meaning in 2017 investors can expect to cut most of the numbers shown on the financial statements in half for the sake of accuracy.
Bottom line
Due to the size of the drop on Friday, I believe that one or more short-sellers on Bay Street may have recognized something wrong with CRH?s model and have begun to short this company in a big way. Over the next week or so, investors will likely get an indication if this massive one-day decline will be limited to a one-time decline with investors taking money off the table recognizing the drop, or if the slide has only just begun and CRH has indeed peaked.
I would recommend extreme caution with this name for now.
Stay Foolish, my friends.
36-Year Old CEO Bets Over $300 Million on 1 Stock
Iain Butler, Lead Adviser of Stock Advisor Canada, recommended this little tech darling to thousands of loyal members last March... and those that followed his advice are up 127.7% (they've already made 2X their money!).
Not to mention this tiny Eastern Ontario company has already been recommended by both Motley Fool co-founders, David and Tom Gardner, because of its amazing similarity to an "early stage" Amazon.
Find out why Tom Gardner was recently on BNN's Money Talk raving about this company, and how you can read all about it inside Stock Advisor Canada. Click here to unlock all the details about his Canadian rule breaker!
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Fool contributor Chris MacDonald has no position in any stocks mentioned. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of CRH Medical and Valeant Pharmaceuticals. CRH Medical is a recommendation of Stock Advisor Canada.
36-Year Old CEO Bets Over $300 Million on 1 Stock
Iain Butler, Lead Adviser of Stock Advisor Canada, recommended this little tech darling to thousands of loyal members last March... and those that followed his advice are up 127.7% (they've already made 2X their money!).
Not to mention this tiny Eastern Ontario company has already been recommended by both Motley Fool co-founders, David and Tom Gardner, because of its amazing similarity to an "early stage" Amazon.
Find out why Tom Gardner was recently on BNN's Money Talk raving about this company, and how you can read all about it inside Stock Advisor Canada. Click here to unlock all the details about his Canadian rule breaker!
Fool contributor Chris MacDonald has no position in any stocks mentioned. Tom Gardner owns shares of Valeant Pharmaceuticals. The Motley Fool owns shares of CRH Medical and Valeant Pharmaceuticals. CRH Medical is a recommendation of Stock Advisor Canada.
