I’m not going to have any charts or graphic’s in this write up because the story for the company is rather self explanatory. Rather I think I don’t need anything more than words to show just how cheap this company is, this will also probably be one of my shorter write ups. To add this is only the second time I’ve invested in a company that operates in the medical industry since I worry about R&D, patents, share dilution etc. when it comes to that field.
US Neurosurgical is a niche medical services company that provides gamma knife’s to cancer treatment centers. A Gamma Knife is used specifically in the treatment for cancer that has entered the brain, and is non-damaging to the tissue contained in the skull. Right now there are 170 Gamma Knife centers in the United States, and US Neurosurgical operates two of the 170. The market cap of the company stands at a towering $3.5 million, and shares are trading for $0.45.
The company trades at 1.12 times book and has a P/E ratio of 6. In the company’s 2016 annual report they reported revenues of $3,212,000 up from 2015 when revenues were $2,971,000. Net income for the year was $536,000 up from 2015 when income was $396,000. Going into 2017 the company followed up great yearly earnings with an equally great Q1 when they reported revenues of $984,000 compared to $832,000 in 2016, net income was $243,000 compared to $198,000.
While these numbers are great what really attracts me to this company is the sheer amount of cash that it is spitting off. The amount of capex the company has to put in the business is nill. To finance the Gamma Knife’s they use a capital lease, the company then charges the cancer treatment center a fixed minimum flat rate of $30,000 a month. US Neurosurgical has to pay about $60,000 a month on the capital lease. So how are they making money you may be asking? They charge a fee for every time the cancer center uses the Gamma Knife based on the procedure being done. A better way to explain this is that the company has a royalty contract with the hospitals, in doing so, they have to pay patient expenses in relation to the revenue percentage that they receive. Just in this last quarter cash provided from operating activities stood at $1,787,000. When you subtract its pseudo capex, which is the capital lease payments, you get a Free Cash Flow for the quarter of $1,537,000, or 43% of its market cap.
This amount of cash produced was helped by decreasing working capital so to give a more normalized view Free Cash Flow from Q1 in 2016 was $436,000, or 12% of the company’s market cap in one quarter. Because the company produces so much cash with little capex it should come as no surprise the large cash position that the company has. Currently as of Q1 it sits at $3.4 million, because the market cap is $3.5 million if someone was to purchase this company outright you essentially get your investment back immediately.
Every investment comes with some risk and US Neurosurgical is no exception. Currently 90% of the revenues comes from the one facility that they have in the NYU Medical Center. An interesting case happened during Hurricane Sandy, the gamma knife had to be removed and repaired because the area where the knife resided was flooded. In Q4 2012 and all of 2013 the company recorded no revenues. Luckily because of built up cash the company made it through this rough period without having to issue shares or take on debt.
Growth strategies include trying to build relationships with other medical centers that want a gamma knife but cannot afford the high capital cost of the item. Their other pathway to growth is making profitable investments through its USN Corona, Inc vehicle.
Not really much to see on their site but take a look for yourself, this is probably one of my favorite companies to study recently: http://www.usneuro.com/index2.htm
Disclosure: I own shares in USNU, this is also not investment advice nor am I an investment professional or an investment adviser