The shares of this healthcare information services company were just upgraded by Guggenheim to ‘Buy’ and seven analysts have increased their EPS estimates for the company in the past 30 days.
HMS Holdings Corp. (HMSY)
From Canaccord Genuity Research
This morning, HMS Holdings Corp. (HMSY) announced the all-cash acquisition of Accent, a payment accuracy and cost containment business. We have a favorable view of this transaction which expands HMS’s core payment integrity (PI) and coordination of benefits (COB) businesses by (1) accelerating growth in the commercial and Medicare markets, which HMS has made efforts to expand into, and (2) enhancing the range of edit and audit solutions that HMS can utilize across its current book of business.
Key details:
• Accent’s services are similar to HMS’ core PI and COB businesses. Accent provides prospective and retrospective claims accuracy solutions for cost avoidance and overpayment recovery. Customers include large commercial health plans, BCBS plans, provider-sponsored health plans, Medicare Advantage, third-party administrators, and self-insured employers. Accent was previously owned by Intrado (previously known as West Corp.), a diversified cloud-based technology company.
• HMS has called out its efforts to expand its COB services into the commercial and Medicare markets, leveraging its experience with COB in managed Medicaid and state government markets. On the 3Q'19 call, HMS’ CEO stated “CMS continues to heighten its focus on Program Integrity and we will leverage our significant payment accuracy experience to expand COB and PI services to both commercial and Medicare Advantage plans.” Additionally, CEO Bill Lucia highlighted the commercial and Medicare COB initiative by stating “the COB opportunity, while in Medicaid continues to grow, is strong in both the commercial and Medicare markets” and that COB is “a gift that keeps giving because we are the experts and we plan to expand it into other market areas.”
• The acquisition is expected to close in 4Q'19. We are not making changes to our model at this time.
• Exiting 3Q'19, the company had $281M in cash and cash equivalents and $240M in debt. The company expects to use cash on hand to fund the $155M purchase price for the Accent business.
• HMS will purchase Accent for ~$155M with cash on hand. Accent generated $50M in LTM net revenue, with adj. EBITDA margins similar to that of HMS. Assuming a margin range of 25-30% would imply Accent generated $12.5M-$15.0M in adj. EBITDA. This implies a purchase price multiple of 3.1x LTM revenue and 10.3x-12.4x LTM adj. EBITDA. We consider this an attractive valuation considering HMS currently trades at 4.0x 2019E revenue and 14.0x 2019E
adj. EBITDA.
Although we do not have specific details of Accent’s historical growth metrics, overall, we view the acquisition as a positive event. Integration of Accent’s services should enhance HMS’ COB efforts in the commercial and Medicare markets, and provide incremental growth opportunities for the company going forward. Additionally, we believe the valuation of the transaction is attractive.
Richard Close and Brian Hoffman, Canaccord Genuity Research, www.canaccordgenuity.com, November 22, 2019