Earnings reports for Turnaround Letter recommended companies for this past week are summarized below. All companies mentioned retain our Buy rating and price targets unless otherwise specified.
Allscripts Healthcare Solutions (MDRX) - The company’s revenues, non-GAAP net income and Adjusted EBITDA were weak and below consensus estimates. Fourth quarter (and full-year) revenues grew 1-2% from a year ago, while gross profits fell for both periods, reflective of a weak product menu. Adjusted EBITDA was flat vs a year ago in the fourth quarter but declined 2% for the full year. Allscripts net debt balance increased from a year ago. Only the share count (7% lower) showed improvement.
First quarter and full-year guidance were weak, indicating flattish at best bookings and revenues, with first quarter guidance even weaker. Full-year earnings per share guidance indicates an 8% improvement. Even if the company meets its guidance, it continues to struggle in a mature industry.
The company replaced its CFO with the current president (Richard Poulton), who will now hold both titles. He spoke candidly on the conference call about the poor performance, which is refreshing, but he has been at the company for eight years - plenty long to make a more favorable impact than we’ve seen so far. Also, we are skeptical that one can simultaneously serve both as a president (operational) and CFO (financial). Not only does this create an immense time burden, it also eliminates an important check on the performance aspirations of the president.
Allscripts’ debt is somewhat elevated, with net debt of just over $800 million. At 2.7x EBITDA, their capacity for additional debt may be constrained, which we view as mixed: they can’t likely fund further acquisitions (a positive) but they are limited in their ability to repurchase cheap shares yet carry some leverage risk (negative).
Allscripts hired an advisor to help develop a full operational (apparently not a strategic) review to help boost their performance. They expect to present a new plan to shareholders later in the year.
Allscripts’ turnaround has not succeeded. As currently led, the company has not been effective at making meaningful changes and our patience is wearing thin. However, we see an improved upside/downside trade-offs given their operational review and the sharp share sell-off (trading at 6.6x EBITDA), so we will wait for more color on their plans or perhaps other more powerful catalysts.
Amplify Energy (AMPY) - The company had disappointing news on several fronts, leading to a sharp share price decline in a weak market for energy and all stocks:
First, while Adjusted EBITDA was slightly up compared to the prior quarter, it was lower than the bottom-end of the company’s guidance range. The company ran into mechanical issues at some of its Oklahoma operations and had delays to its Bairoil plant expansion project. These issues led to a shortfall in daily production volumes as well as higher costs. While management said these issues have been fully resolved, their full-year guidance doesn’t indicate much if any improvement.
Second, the company cut its dividend in half to preserve its capital. We think this is prudent, but the company previously had spoken confidently about the sustainability of its dividend.
Third, Amplify hired investment bankers to help it identify and potentially buy struggling exploration companies. This is a complete reversal of their previous strategy to generate and return free cash flow to its shareholders through “long-term, sustainable dividends and share buybacks”. If the company is looking instead to become an acquirer, our interest diminishes considerably, particularly as Amplify itself is not in a strong capital position. In a highly cyclical commodity industry that is in an over-capacity and low-demand situation, Amplify’s original strategy was the right choice and potentially a very profitable one. Doubling-down is not.
The only two traits holding our interest is the increased likelihood of a backtracking on this strategy, and the chance for a bounce in the heavily-discounted energy sector where nearly all for-profit producers of all sizes will be trimming production even as sovereign producers can’t seem to reach an output cut agreement.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.