HealthStream Stock: Strengthening Play On Healthcare Labor Thematic

Investment Summary

Global healthcare providers have faced systematic pressures in 2022 underscored by an equally as challenging healthcare labor market. Chief amongst these include wage inflation, high staff turnover, and robust job demand.

According to research published by Fitch Ratings, citing the latest data from the Bureau of Labor Statistics (“BLS”), data points to a challenging labor market, as job vacancies in the healthcare and social assistance sectors remain high in the face of low unemployment.

While the labor market has shown signs of improvement since late 2021, the industry’s quit/termination rate and overall labor force participation rate remain below pre-pandemic averages, and Fitch asserts that further progress must be made in terms of hiring, retention, and labor availability before any significant easing of pressure on expenses can be expected. It mentioned that “[a]s of September 2022, the number of employees at hospitals (medical facilities providing constant inpatient care) and ambulatory health care services (clinics, urgent care, free standing emergency departments, etc.) was 0.09% and 4.65% above pre-pandemic levels, respectively”.

Moreover, throughout our research endeavors during 2022, the labor question has been a dominant thematic amongst earnings calls for the entire year. This seems to have picked up somewhat in the H2, anecdotally speaking.

On this backdrop, I’m here today to discuss our buy thesis on HealthStream, Inc (NASDAQ:HSTM), a provider of workforce solutions to U.S. healthcare organizations. After extensively reviewing all of the moving parts in the HSTM investment debate, we rate HSTM a buy, seeking price objectives of $30, then $35.

HSTM 24-month price evolution. Note the volume ascent since H2 FY22, suggesting accumulation from large accounts.

Q3 numbers demonstrate resiliency against current macro-thematic

We first turn to HSTM’s latest set of earnings, where it was a reasonable period of growth for the company [note, it reported in late October]. We saw it recorded top line growth of ~500bps YoY, clipping revenue of $67.3mm for the period. In terms of operating income, the company saw a 33% increase to $2.4mm compared to the same period the previous year, on adjusted EBITDA of $12.7mm, a YoY increase of 200bps.

With the latest HSTM share price rally, as a driver, we’d suggest that its Q3 bottom-line fundamentals were well-recognized by the market. Net income rose significantly to $3.7mm, representing a 144% increase from the $1.5mm recorded in the same period the previous year, and it pulled this down to EPS of $0.12 – well aloft the $0.05 last year. Furthermore, the company’s hStream subscriptions reached a total of 5.35mm, an increase of 50,000 subscriptions from the previous quarter.

There were several other highlights worth mentioning from the period. Our takeaways are as follows:

1. As the year progressed, HSTM made a bold decision to put a halt to the sale of outdated, installed software in favor of subscription-based, software-as-a-service “SaaS” solutions. In addition, the company embarked on a conversion strategy with the goal of ushering customers away from old-fashioned installed scheduling software, and push towards the modern, convenient world of SaaS-based scheduling solutions. It is the conviction of HSTM that these choices will prove to be of great benefit to customers, the company, and unlock long-term risk capital for shareholders.
2. Moving along, we also saw that, during the period in question, HSTM’s days sales outstanding (“DSO”) came in at a streamlined 38 days, a marked improvement from the 40 days recorded in the previous year. Meanwhile, it’s also worth noting that YTD CFFO soared to $43.1mm for the quarter, a significant uptick from the $36.4mm recorded in the previous year.
3. It also realized free cash inflows totaling $24.1mm, again a notable increase from the $17.3mm recorded in the previous year. In terms of the company’s share repurchase program, no repurchases were made this quarter, and there remains a balance of $1.9mm under the plan, set to expire in March 2023 unless terminated earlier by the company.

These favorable outcomes demonstrate a tone of resilience in the face of the current macro-thematic in our opinion, whereby corporate earnings, yields and credit markets have each been re-rated consistently throughout the year. In our estimation, these are equally as favorable characteristics [growing CFFO and FCF, improving bottom-line fundamentals, etc] looking ahead, in light of the distribution of probable outcomes for the global economy.

You can see a wider look-back at HSTM’s core operating results in the chart below. Note, that at the current enterprise value, investors can buy HSTM at a 6.41% trailing free cash flow yield, which we believe is a standout in the investment debate. You’ll note this has been trending north over some years now, on a sequential basis.

Exhibit 1. HSTM quarterly operating run-down, FY16–date [revenue, core EBITDA, trailing FCF yield].

As the year draws to a close, HSTM also revised its guidance expectations for the full-year. The company expects consolidated revenues to fall within the range of $265.5mm–$267.5mm on adjusted EBITDA in a range of $52mm–$53.5mm. Moreover, it calls for net earnings of ~$11mm at the midpoint. These are within the scope of previous estimates. On these growth ranges, it plans to keep CapEx between $25.5mm–$26.5mm.

This is also a bullish contention to factor in, as we’ve been looking to align with companies that are either reaffirming or revising FY22 guidance to the upside at any point vertically down the P&L. You can see HSTM’s projected consensus revenue and EPS estimates in the charts below [Exhibit 2 and 3], noting that investors foresee a period of ongoing growth at the top and bottom lines looking ahead. This further adds to our bullish thesis, and we are aligned with consensus views.

Exhibit 2. HSTM FY22–23′ revenue forecasts [consensus estimates].

Exhibit 3. HSTM EPS growth assumptions [as above].

Valuation and conclusion

We’d also mention that consensus has HSTM valued at 73–67x forward P/E [non-GAAP and GAAP respectively].

These are lofty multiples, but not out of sync with previous levels over the last decade [Exhibit 4].

Exhibit 4. HSTM consistently trades at lofty multiples of EPS, from 2012–date.

• HSTM P/E [daily], FY12–date.

We also see technically derived price targets to $31 then $35.5, based on our point and figure studies seen below [Exhibit 5].

Exhibit 5. Upside targets to $31, then $35

In addition, it’s not an unreasonable forecast for HSTM to print a $0.37 EPS [GAAP] in our opinion. This assumption is built from our projected $266.3mm in FY22 revenue on adjusted EBITDA of $52.5mm. At these EPS assumptions, we believe the stock should trade higher than consensus numbers, at ~82x forward earnings. Value investors would be rolling their eyes right now for sure, however, we’d also note the estimated S&P 500 forward P/E for FY22 and FY23′ is 21.5x and 19.12x respectively. Hence, both consensus and ourselves expect the stock to outperform the benchmark considerably these coming 12 months, trading at 82.1x expected earnings. This also confirms our buy thesis.

Exhibit 6. Fair forward P/E of 82x $0.37 = $30.38.

Net-net, we rate HSTM a buy on the principles discussed throughout this report. We are seeking price targets of ~$30, then $35 in this name.