10/23/2023

Joint Corp (JYNT): From Growth to Deep Value

 Description:

The Joint Corporation (JYNT) is the largest domestic franchisor and operator of chiropractic clinics. The company aims to provide affordable chiropractic services in this fragmented market using a private pay, noninsurance, cash model. Joint has 900 locations in the USA and plans to open 100-120 newly franchised clinics in 2023.

Overview:

With double-digit top line growth, Joint is also undergoing financial and strategic changes. As the largest chiropractic provider, it's positioned to capture a significant share of this fragmented market. A strong investable opportunity exists due to dramatic oversold conditions, financial improvements, and operational flexibility. Management is committed to selling nonperforming assets, franchising, and reducing expenses.

The valuation has materially improved, mainly driven by JYNT's drop in market value. This price decline is in the face of consistent double digit top line growth. This progress and a decline in the company's market value creates an investable opportunity. Many low hanging operational levers remain to enhance shareholder value.

A closer look at Q2 2023 reported in September.


In Q2 2023, The Joint Chiropractic revenue grew double digit. Yet, management recognizes they needed to make operational changes. To partially address these concerns, Lori Abou Habib was appointed to lead marketing.

 Joint Chiropractic focuses on short appointments and affordability. This distinct approach attracts new patients. They also emphasize providing treatments like standard adjustments rather than complex clinical diagnoses. And they don't accept insurance.


While JYNT is making internal changes. External accolades from reputable franchise publications and rankings affirm its strong market position. JYNT's mix of operational flexibility and market recognition suggests undervaluation.

Preliminary revenue for Q2 2023 increased by 18% compared to the prior year quarter. Growth improved performance in franchised and company owned clinics. Company owned clinics (+23%) and franchise operations (+11%) drove the revenue increase. Preliminary adjusted EBITDA reached $3.2 million, a 23% increase over the same period last year. Cost control measures such as a hiring freeze, reduced travel expenses and canceled nonessential projects were implemented. Further, the divestiture of specific corporate clinics optimizes productivity and reduces SGA. The financial guidance for 2023 has been revised downward due to changes in accounting, divestiture plans, and economic factors. A renewed focus on cost reduction helps prepare for economic uncertainty and lower revenue expectations.

Clinics had a negative 1% decline in sales for clinics operating beyond 48 months. Management expects these challenges to persist in the second half, but options exist to counter them. Their key metrics - new patient count, conversion rates, and attrition - show promise, with attrition and conversion improving. However, their new patient count is slowing. To address this, Lori oversees their marketing efforts, focusing on two key sources of new patients: referrals and local marketing initiatives. 30% of new patients come from referrals. Their clinics cater to those within a 5- to 15-minute radius, and they must educate this local audience about their services. Through traditional means like coupon outreach to schools and gyms.

In summary, The Joint faces challenges but is working to overcome them.


Opportunities:


The Joint faces internal (underperforming owned locations) and external challenges (economic/ inflation). But the market undervalues their growth, unique niche, flexibility, operational leverage, financial stability, and mean reversion.

The company is transitioning and adjusting its strategy on a large book of business of 111.74M in revenues for the trailing twelve months.  Lori Abou Habib was appointed Chief Marketing Officer. Prior to this, she worked at the SONIC Drive-In Franchise Brand. Her franchising expertise complements the refined strategy.

The Joint Chiropractic moved up to 52nd on Entrepreneur Magazine's 2023 Franchise 500 from 57th in 2022. This ranking evaluates cost, growth, and brand strength. The Joint is recognized by Forbes, Fortune, and Franchise Times for its growth and approach. In 2023, it was 18th on Franchise Times' Fast & Serious list. The Joint was also 1st on Forbes' 2022 Best Small Companies, 3rd on Fortune's Fastest-Growing Companies, and consistently ranks high on franchise lists. In 2023, it was named a Top Franchise by Franchise Business Review and was in their 2022 Most Profitable Franchises report.

Operating leverage is powerful with little or no costs for each new patient.

Aggressive insider buying from Bandera. In 2023, Bandera purchased 1,472,047 shares for $15,476,620 at an average cost of $10.51 per share. In total, Bandera owns 3,937,296 shares, or 26.69% of shares outstanding or 37.28% of float.

Mean reverting attributes such as a decline of -86% in EV per share from year end 2021 to today.

Valuation ratios have improved significantly. EV/Revenue at 1.26 improved 89% from 2021 amount of 11.89. The Price/ Operating cash flow is 7.72, an improvement from the 70.86 balance for 2021.
 

F score of 8 is a historical high. An increase in the following drove the F score of 8. Positive change in ROA, cash flow return on assets (CFROA) > ROA, positive change in return on assets, cash flow return on assets greater than the return on assets, positive change in working capital ratio, increase in gross margins, positive change in asset turnover. Two points were lost on the F score due to a slight increase in shares outstanding, and a long term debt to average total assets increase.

Opportunities for cost reduction. Hiring freezes, selling/closing corporate own locations, reduced travel expenses, and canceled non-essential projects will positively impact the bottom line. These steps are vital in curbing general administrative expenses. SGA per share increased 47.37% from 6.36 for the TTM versus 4.32 for 2021.


The Joint is transitioning toward an asset light franchise model. Asset depreciation and cost inflation will improve after the sale or closing of nonperforming corporate owned locations. 


Risks:

Several factors drive investor's concern and has a significant short position at 6.26% of the float. In 2021 and 2022, the Joint had to restate its financial statements. And reported a material weakness in their internal controls. Further, implementing updated accounting methods may impact reported earnings. The accounting change is tied to the reacquisition of regional developer rights and transfer pricing. Also, there are concerns about the saturation of JYNT's clinics in certain areas.

Competitors might replicate JYNT's business model. However, JYNT doesn't compete with regional or national entities. A short report forecasted a decrease in the company's stock price. This report negatively influenced the stock price. However, the short report has been challenged as misleading. 

Skepticism about chiropractic care may contribute to unfavorable stock valuations. There are concerns about new market entrants and regulatory changes.

Compared to prior years, stock compensation has grown 23% from 2021, and financial liquidity using the quick ratio declined 28% from 1.37 in 2021 to current balance of .90. SGA per share grew +47.37% from 2021 to TTM versus revenue per share improvement of +40%. 


JYNT has a promising model. However, increased competition is real if other chiropractors adopt the same business model.


Valuation.

A valuation analysis can help determine JYNT's expected price by analyzing its intrinsic, relative, and historical value.

I used a DCF to calculate intrinsic value. It shows a market price slightly above the estimated intrinsic value using historical earnings. But the current market value is significantly discounted if we use average earnings from 2019 to 2021. Also, using free cash flow for a DCF shows a discounted market price to its intrinsic value. Historical earnings have not been consistent or predictable. This lowers the intrinsic estimate compared to using relative and historical valuations.

Earnings Power Value (EPV) exceeds the current price. EPV uses current earnings without considering growth. The assumption is the business will maintain its earnings forever, with no growth/change.

Using historical multiples like P/E, P/B, P/FCF, P/S, coupled with consistent double digit growth shows JYNT market price trades at a material discount.

I believe JYNT's stock price is trading below its fair market value. For me, this high risk stock is a buy.  However, I will add on weakness given the economic challenges and operational changes. Because in the next six months, we won't see the full benefits of their operational changes.
 

Conclusion:

The Joint Corporation is the largest domestic chiropractic clinic franchisor. JYNT is a risky stock. But, with double digit consistent top line growth, near profitability, and financial stability, the stock is a buy after the irrational 86% decline in EV per share from 2021.Along with that market decline, revenue per share grew 40% from 2021 and 86.38% from 2020. Further, valuation ratios are at historical lows and relatively cheap. Entrepreneur Magazine's rankings and accolades from Forbes, Fortune, and Franchise Times have recognized the Joint's accomplishments.

With aggressive buying from Bandera, cost cutting measures and growth, their future looks promising.

Don't forget JYNT is a high-risk stock. Past financial restatements for 2021 and 2020, local market saturation, and weakening financial position present risks. However, the company's move towards an asset light franchise business model underscores its optionality. While valuation analysis suggests JYNT is undervalued, the full benefits of their recent changes and changes over the next quarter will likely be more visible in the longer term. JYNT is a potentially rewarding investment opportunity.



Supporting data:



3/20/2023

Potential investment ideas (work in progress, not recommendations)


None of my comments below are recommendations! This is a diary that will continue.

Cumulus Media (CMLS) owns and operates 400 radio stations in the United States.

Aggressive debt payment and share repurchases from the year ending 2021 to the MRQ coupled with improved valuations. Increase in RE per share, BV with a declining MC and EV per share.

Price on 03/20/2023 = $4.10


Yahoo Quote CMLS








Safeguard Scientifics (SFE)

Current price = $1.87  on 03/20/2023


DigitalOcean Holdings ( DOCN )

Current price = $34.71 on 03/20/2023


Zumiez Inc (ZUMZ)

Current price = $17.65 mistakingly removed  07/13/23 added back 07/14/23





To be continued...








12/26/2022

Alpha Pro Tech (APT): An Intelligent Investment


Summary

Alpha Pro Tech is an intelligent deep value investment in the tradition of Ben Graham. It has a $50 million market capitalization with an enterprise value of $36 million. Debt is a small lease.

The stock offers a unique investment opportunity - a strong financial position supported by 10 years of FCF profits and selling below its NCAV.

The company derives its revenue from two segments -- building supply products(~60%) and disposable protective attire(~40%). In most industries, disposable protective apparel is required.

The current valuation more than accounts for potential slowdowns. Management offers shareholders a satisfactory return through consistent share repurchases. 

Company Description

Alpha Pro Tech (NYSE: APT) develops, manufactures, and markets building supply products. Their other segment is disposable protective attire (DPA). Technology, industrial and medical industries use protective apparel garments such as coveralls, face masks, gloves, and shields. Historically, the building supply segment accounted for 60% of total revenue—the remaining 40% is protective apparel. In addition, management noted many products develop through direct communication with end-users—coupled with FDA-approved facilities required to manufacture their products, creates a modest barrier to entry.

Alpha Pro Tech is an intelligent deep value investment in the tradition of Ben Graham. It has a $50 million market capitalization with an enterprise value of $36 million. Debt is only a small lease. APT offers a unique investment opportunity - a strong financial position supported by 10 years of FCF profits and selling below its NCAV.

I started an APT position. Although, an expected slowdown in the housing and protective garment industry may depress the stock price. But I will use market weakness to add to my existing position. Investors can expect a generous shareholder yield while holding the stock with a history of aggressive share repurchases. Management recently announced more funds committed to stock buybacks.

Note the sharp increase in sales during 2020,2021 and the reduction in 2022. The increased sales were from their Disposable Protective Apparel products. Now the effects of COVID-19 are normalizing. But government and company requirements may change. In addition to being a cheap BS and high earnings yield stock, the current valuation more than accounts for potential slowdowns. And to repeat, management offers shareholders a satisfactory return through consistent share repurchases.

The table below shows net income for the three- and nine-month periods ending 09/2022 as per their 10-Q. Note the year over year profit contribution decreased from their disposable protective apparel line. Most importantly, the $4.2 million unallocated overhead expense (C-suite) for the nine months ending 09/2022. The annualized unallocated expense of ~$5 million is saved if acquired by a larger entity/competitor such as Lakeland Industries (LAKE). The considerable C-suite savings makes for an even more attractive acquisition candidate.

 









Opportunity/Valuation

The table below highlights Alpha Pro Tech as an investable value anomaly from a discounted net assets and earnings perspective. Notice the significant increase in book value and retained earnings per share. These positive results compare even more favorably to the decline in enterprise value per share over the same multiyear periods.  Book value per share increased 110.74% from 12/2018 to MRQ. Retained earnings per share increased 129.75% over the same period. This contrasts with an enterprise value per share declining -69.72% from 12/2018 to the most recent quarter.

Net current assets trade at 75% of enterprise value. Additional value metrics are the low enterprise value to gross profit, tangible book value, earnings before interest and taxes, and revenue. These measures are at or near low historical and relative valuations.






Risks

The building supply segment (home repair and construction) faces a challenging macro environment with rising interest rates and a potential 2023 recession.

Labor and material inflation is likely to impact margins.

Personal protective equipment (PPE) may see less demand and increased competition after COVID normalization.

Donna Millar, the deceased co-founder's wife, owns 10.26% of the shares, amounting to 1,284,603.

Years of zero insider buying; CEO Lloyd Hoffman sold most of his shares during the 2020 irrational market price run-up from COVID impact on demand for protective disposable clothing. CEO Lloyd Hoffman sold 1,251,574 shares at $31.65, or $39,608,120, in 2020.

A rising day sales outstanding is indicative of inventory buildup. The average days in inventory were 217 for the trailing twelve months compared to the historical average of 123 days.

Excessive executive compensation for a tiny company. Annual compensation, CEO Lloyd Hoffman 2020 = $1,632,000, 2021 = $1,079,000: Senior VP of Manufacturing = 2020 = $791,826, 2021 = $626,382, CFO = 2020 = $505,250; 2021 = $378,000


Conclusion:

Alpha Pro Tech is an intelligent investment in the tradition of Ben Graham. It's cheap on historical FCF earnings, break-up value, reproduction, or sum of its parts. Further, investors get paid to wait with a high historical shareholder yield from share repurchases and increasing BV.

Catalysts
The company continues to create shareholder value with share buybacks.

A stable high free cash flow yield over the prior ten years with the expectation to continue.

Double-digit increases in book value, retained earnings, EBIT, and revenue per share versus a declining enterprise per value share.

A revised government and corporation mask requirement is possible with new variants and diseases. In addition, N95 masks require a more complex FDA-approved process and specialized materials.

Additional product international sales are likely by leveraging its investment in Indian manufacturers.

A company sale to a larger entity is possible. Management has long-term multi-decade service so that senior management may be open to the company sale.

Disclosure: Long APT

4/25/2022

Nautilus: Priced below Liquidation

Description:

Nautilus (NLS) is a fitness solutions company. It designs and markets cardio and strength fitness products. Treadmills, ellipticals, stationary bikes, and weightlifting equipment sell under the Nautilus Bowflex, Schwinn, and Universal brands. And, offers a fitness digital platform, JRNY. My interest in buying NLS is quantitative. I won't speculate on the supply chain, inflation, competition, or online strategy. Or how Peloton's (PTON) race to the bottom on price affects NLS near-term stock returns.


Valuation:

The market is pricing Nautilus for distress/bankruptcy at $3.02 or a market cap of 98.432 million. But NLS has a margin of safety with their valuable brand names in Nautilus, Schwinn, and Universal. Further, per-share values of 4.09 for inventory, 3.25 for receivables, 5.64 retained earnings, gross profit 6.61, revenue 21.17, and equity of 5.78. The NCAV is 2.38. And asymmetric returns if the online strategy proves mildly successful. The 52-week price change is -82%, a three-year return of -41%, and no change in the shares outstanding from 12/2015 to MRQ.

Trailing tangible book value for the TTM per share is 4.70. An increase  152.19% versus the average value of 1.86 from 2015 to 12/2020. Per-share gross profit, revenue, and EBIT values increased 2.79%,64.13%, and 60.34%, respectively, versus the average values from 12/2015 to 12/2020. The stock price change over the same period declined by -76.65%!

Valuation ratios highlight the extremely oversold situation. For example, P/TB is 90.78% lower at .67 versus the average value of 7.27 from 12/2015 to 12/2020. Likewise, P/S is 85.17% lower at .15 versus the average value of 1.01 from 12/2015 to 12/2020.

The table below shows Nautilus' current discounted valuation metrics versus historical results. Comments on trailing ten years.








The table below shows the disconnect between value creation versus price declines and additional comparisons to Peloton and NAISC (339920) Sporting and Athletic Goods Manufacturing. 


Book value and retained earnings per share changes versus the price over the same period show value creation versus stock price decline. Also extreme are the price to sales, price to book, and enterprise value to gross profit relative to PTON and NAISC 339920. 


























Risks:

Nautilus sells commodity products with growing competition. Equally important, management is pursuing a costly money-losing online strategy. The strategy has a high probability of falling short. March 2021, Nautilus acquired motion technology VAY to expand its uncertain profitable JRNY digital platform.

Management forecasts negative operation results until 2023. Further, the growing inventory balance may indicate deeper problems. Additionally, input cost inflation with steel, memory chip shortages, and the supply chain weighs on their future. Nautilus uses Chinese contract manufacturers and will face the uncertain impact of shutdowns and geopolitical risk. The larger Peloton is going all-in on their turnaround, coupled with Nautilus struggling to create an online presence with an inferior quality brand reputation to Peloton.


Conclusion:

Nautilus is  balance sheet cheap with a market price below liquidation value. Current assets, brands (Nautilus, Bowflex, Schwinn, Universal) and leadership in strength training contribute to its estimated price below liquidation value. Further, the per-share increase in book value and retained earnings don't reconcile with the stocks dramatic price decline. Additionally, if management executes, the stock price will see asymmetric gains assisted by the 10.5% of the float that is short.

Activism and a company sale is possible.   C suite is motivated by generous RSU and PSU compensation. "As of December 31, 2020, unrecognized compensation expense for outstanding but unvested stock-based awards was $7.2 million, which is expected to be recognized over a weighted-average period of 0.3 to 1.8 years". The equity incentive has increased since the 10K on 12/2020.

I recommend buying NLS for SPECULATIVE investors at current prices.

                                                            
Long NLS

8/11/2021

Spark Networks (LOV), A Risky Value Outlier

Spark Networks (LOV) is a global dating company. It focuses on the growing 40+ age demographic. And, religious minded singles looking for serious relationships.

Spark Networks has a growing portfolio of dating apps with branded websites. The company has around one million monthly paying subscribers. Brand names are Zoosk, EliteSingles, SilverSingles, Christian Mingle, Jdate, JSwipe. Affinitas GmbH merged with Spark Networks in 2017 to create the publicly listed LOV (Spark Networks) with the addition of Zoosk in 2019. Headquarters are in Berlin, Germany, with offices in New York and Utah.

The market is ignoring Spark's transformation and the extreme valuation discount to competitors. Yes, it's risky. But the rewards are asymmetrical if they prove further progress. Improvements include a new C-level management team. Research and development of 54.10M spent over the last two years for crucial product enhancements. Investor transparency by transitioning to U.S. domestic filer with quarterly filings and an investor outreach campaign.

Many of their prior one/two-year investments and changes will be realized in the second half of 2021. Such benefits are live streaming video (launch Q3 2021), social discovery functionality, improved matching algorithms, portfolio rebranded/look, customer relationship management. As a result, management expects higher 2021 revenue.


Financial results 1st Qtr 2021

May 17, 2021, the company reports Q1 results for the first time as a domestic filer. Sparks is now reporting quarterly, improving financial /operational transparency, and building a shareholder base.

Spark is presenting at several institutional investor conferences this quarter. The goal is to communicate details on overlooked growth and opportunities for improved profitability.

The target demographic is 40 plus and faith based. This segment is growing 7% faster than the market. Also, management is forecasting organic growth for Zoosk, EliteSingles, SilverSingles, and Christian Mingle.

Financial results were flat this quarter. Although,  product enhancements continued along with finalizing the CFO search. YOY quarterly revenue decreased by $1.3M to $56.4 million compared to $57.7 million. The decline in revenue is because of a 3% decrease in average paying subscribers driven by Zoosk. The three largest legacy brands, SilverSingles, EliteSingles, and Christian Mingle, grew at low double-digits in North America.

The first quarter adjusted EBITDA was $4.8 million. A decrease of $2.7 million compared to $7.5 million in the first quarter of 2020. The decline is due to Zoosk and coupled with a headcount increase. Average paying subscribers decreased by 27,837 or 3% to 896,344 in the first quarter of 2021, compared to 924,181 in the same period for 2020. Spark's monthly average revenue per user (monthly ARPU) increased to $20.97 in the first quarter of 2021, compared to $20.8 in the same period of 2020.

The company ended the quarter with $17.3 million in cash and $96.1 million in debt. As of March 31, 2021, equity was $91.8 million, compared to about $94.9 million as of December 31, 2020.
Management reiterated 2021 guidance of $238 million to $244 million in revenues and adjusted EBITDA of $33 million to $36 million. Forecasted second quarter 2021 revenue is in the $54 million to $56 million range and adjusted EBITDA of $6 million to $7 million.

A significant opportunity exists in the fast growing 40 plus faith-based relationships segments, combined with their recognized brands and product improvement, which should push growth for years.




Relative valuation:

Relative valuation is impressive for LOV. It's a stretch to compare LOV to profitable industry leaders and much larger BMBL(Bumble) and MTCH (Match Group). But, Spark's price or enterprise to sales, gross profit, book value is startling at a ~90% lower valuation(see below). Lower valuation per subscriber versus MTCH and BMBL. Further, LOV is near its 52 weeks low and outspent on research and development relative to its market value for the prior two years.












































Risks:

The inability to refinance large debt. 

Negative cash flow, and failure to post positive net income. 

Excessive advertising expense to maintain subscribers.

Permanent damage to the brand's value if subscribers decline. And critical mass is not reached to make the brand attractive for new online daters.

Delta Covid variant could impact demand for online dating.


Conclusion:

LOV is RISKY! But it trades at an EXTREME relative discount. And, the discount coupled with the transformation progress makes LOV a RISKY BUY. The extreme discount includes market value to sales, gross profit, book value, and research development. Further, the market's valuation on its per subscriber contribution is the industry's lowest. (see table above).  Also, the online dating market is growing with limited competition from four national companies, including Spark Networks. In addition, MTCH and BMBL are public. Further, LOV is the worldwide leader in faith-based dating brands, coupled with the 40+ seeking a long-term relationship.

Spark is at the end of its transformation with new management, expense reduction opportunities, product enhancements, and consolidating brands under a single platform. Additionally, debt refinancing is likely with the new CFO and has an attractive asset-light business model with recurring revenues trading at multiples seen with a distressed retailer. Management is forecasting improved results. Free cash flow reported was 25.95M for the prior period 06/2018 to 12/2020, 37.17M for CFFO.  Further, Spark transitioned to U.S. domestic filer with quarterly filings and with an investor outreach campaign. The new management team is incentivized with equity (12.09M in stock-based compensation from 06/2018 to 12/2020). The new team replaces a prior management disaster.


Long: LOV