Health Insurance Innovations ( Nasdaq - HIIQ ) -- Expands its Platform

Health Insurance Innovations (HIIQ $12.75) is a leading provider of short term medical plans.  It provides ancillary products, as well, including hospital indemnity, pharmacy, vision, and dental insurance.  A growing percentage of customers bundle more than one plan.  The company works with several major carriers like ING, Cigna, Nationwide, and U.S. Fire.  Those companies provide the actual underwriting.  Health Insurance Innovation works with them to design the products.  Primarily, though, it acquires the customers through its own agents and an external network of more than 100 call centers.  A variety of marketing techniques drive business to those sites.  The short term policies offered by the company are significantly less expensive than comparable Obamacare plans (excluding subsidies).  They normally extend for 6-11 months, making them exempt from the new law's stipulations regarding pre-existing conditions and guaranteed issue.  For healthy individuals, they provide attractive coverage because the same services are provided and the price is much lower, often as much as 40%-50%.  In the past a lot of prospective customers were reluctant to buy short term medical plans because they couldn't be renewed automatically.  That's still the case.  But under the new law if a chronic disease is acquired an individual can switch to an Obamacare policy, ensuring treatment.  Most of Health Insurance Innovation's customers are young and healthy.  Fewer than 5% are prevented from renewing due to health factors.  Those people now can buy a guaranteed issue plan on an exchange, eliminating that small risk.  Business has accelerated during the first half of 2014 as a result.

A recent acquisition will broaden Health Insurance Innovations' potential market.  The company has been working with Health Pocket, the new unit, for the past six months.  Much of the acceleration in growth the company has enjoyed is due to that relationship.  Health Pocket offers a database for consumers that contains virtually every health insurance policy for sale in the United States.  An easy to use interface enables potential buyers to search by key variables including price, deductibles, doctors, disease coverage, and geography.  Once a prospect narrows down his choices a toll free number appears, directing him to an agent who can explain the details and determine the right deal.  A click to chat option is available, as well.  The percentage of callers who purchase is much greater compared to callers responding to banner ads and other general promotions.  Growth in new business has topped 100% at Health Insurance Innovations over the past two quarters, driven in part by Health Pocket's high quality sales leads.  That trend in the short term medical segment appears likely to continue.

The Health Pocket deal will open up the Medicare Advantage and Small Group segments, as well.  Health Pocket currently is diverting those leads to other companies, earning a small commission.  Health Insurance Innovations plans to steer them to its own agents and affiliated call centers, sharply raising revenue per policy.  Customers who are best served by Obamacare plans, due either to the likelihood of subsidies or other factors, will be directed to the appropriate exchange.  Those deals will generate a modest commission.  The Medicare Advantage and Small Group markets each are at least 500% larger than the short term medical segment.  Revenue could exceed the short term business in 2-3 years, perhaps sooner.  Margins promise to be similar.

Profitability is likely to widen as volume expands.  In-house agents and external call centers earn commissions on the business they close.  Those expenses are variable.  But Health Insurance Innovation's technology platform is highly scalable.  Those costs are likely to increase far less rapidly than sales.

Our 2014 estimates assume that consolidation expenses will temporarily impact profits.  Some non-recurring costs are inevitable as the two companies officially join forces.  Health Insurance Innovations already is spending heavily on sales and marketing.  Those efforts might be reorganized to put some weight behind the Medicare Advantage and Small Group initiatives.  But the total amount spent may not expand too much.  If they do, earnings may finish below our forecast of $.40 a share.  (Prior to the merger we had estimated income of $.55 a share on $80 million in sales.)

Next year sales could advance 67% to $150 million to provide income of $.95 a share.  New business may climb at an even faster pace.  Revenue is recognized on a month to month basis, though, so even if a mountain of policies is written the recognition of that business will be spread out.  Medicare Advantage and Small Group plans ordinarily renew at a higher rate than short term policies, creating the potential for additional leverage down the road.  In 2-3 years revenues could attain $250-$300 million to yield income of $2.05-$2.65 a share.  Applying a P/E multiple of 20x to the midpoint of that range suggests a target price of $47.00 a share, potential appreciation of 265% from the current quote.

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Northern Technologies International - Rust Never Sleeps

Northern Technologies International (Nasdaq: NTIC $20.45) is a leading provider of anti-corrosion technology and solutions. The company mixes its formula with plastic pellets to create plastic sheets, which can then be formed into bags of various sizes. Parts are placed into the bags to inhibit vapor corrosion. The chemicals inside the bags release gases that will settle on the parts, keeping them protected. Once the bag is opened, the chemicals will evaporate. The company also sells to oil and gas companies, both to preserve flanges on ocean rigs and to safeguard oil storage tanks.

Northern Technology initially sold its products to automobile manufacturers. The company's offering is an alternative to "dipping lines," a method where car parts were coated in grease to protect them from rusting during transit and storage. Dipping tanks take up space and also present fumigation and fire hazards. Also, dipped pieces have to be cleaned off before being put to use.

Corrosion costs companies around the world roughly $300 billion per year. Of that amount, losses in the oil and gas industry total about $126 billion. Northern Technologies currently generates 9-10% of its revenue in the oil and gas sector. The company expects this business to grow faster than its core business, based on increasing demand and not much in the way of direct competition.

Nothern Technologies has two primary opportunities when it comes to the oil and gas industry. The first is protecting flanges on off-shore oil rigs. These rigs have miles of pipes that are connected by these flanges. Left unprotected, flanges generally need to be replaced in a matter of months. Rust and corrosion can  prevent the flanges from opening or closing, and a malfunctioning flange can lead to disaster in the event of an emergency. Revenue from an oil rig depends on the size of the rig and the number of flanges that can be treated. Some flanges operate at a high temperature that would compromise the corrosion inhibitor. Northern Technologies  generates about $50 in revenue for each flange it treats. Larger oil rigs can have around 8,000 flanges.

The company also treats oil storage tanks. The crude oil that's stored in these tanks usually isn't in there alone -- significant amounts of sulfur, water, and other contaminants like to crash the party. The sulfur and water can combine into hydro-sulfuric acid, that is very damaging to the tanks. It can cost a company millions of dollars per day to take a tank out of commission for repair or replacement. The company charges $25,000 on average for a tank job, but it ranges from $10,000-$100,000 depending on the size of the container.

Nothern Technologies operates with a number of joint ventures. The business model is derived from the Coca-Cola system, so the company ships the "secret ingredient" -- in this case, the chemical additive -- to its partners, and lets them deploy it in projects worldwide. There is a basic understanding that Northern Technologies will provide ongoing technical support to its joint ventures, including R&D. The joint ventures are responsible for sales and marketing in their respective territories. Northern Technologies pays taxes in the countries its joint ventures operate in, and receives foreign tax credits in the US. It is responsible for any difference between the foreign rate and the US rate.

Price negotiation can be impacted by the customer's circumstances. In 2004, one U.S. automaker learned the value of Nothern Technologies the hard way. The automaker decided to shift to a Chinese part supplier to cut costs. The problem was that this new supplier had very little experience in shipping these parts overseas and didn't take proper precautions. The parts passed through essentially every type of climate imaginable on the route from Northern China to Detroit. The parts were useless upon arrival, and the carmaker had to have new parts delivered via air freight to prevent production lines from shutting down. The automaker wound up losing billions of dollars that year. The company then hired Northern Technologies to work with the manufacturers in China and ensure the parts could be safely shipped by sea. In this case, Northern Technologies was able to negotiate a very favorable deal, because the automaker didn't have much of a choice.

Earnings per share have increased 58.8% since 2010, from $0.51 to $0.81 in 2013. We project earnings will finish 2014 at $1.05, and we have set a 2-3 target of $2.20-$2.80 per share. Applying a P/E ratio of 20 to the midpoint of that range suggests a target price of $50 per share, an appreciation of 145% over the current price. Revenues figure to be in the neighborhood of $28 million for 2014, per the company's guidance, a 24.4% increase over $22.5 million in 2013.

Eric Ramsley

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Apollo Medical - Nothing but Net

Note:  This is a "guest column" written by a friend of Growth Stock Insider (Jody Cain of Financial Profiles).  The information has been obtained from sources believed to be reliable but it is not guaranteed either bgy the author or Growth Stock Insider.

Apollo Medical Holdings, Inc. (ApolloMed) (AMEH: $0.53) is a leading integrated healthcare services company for patients, hospitals, health plans, physicians and other key healthcare stakeholders. ApolloMed’s mission is to provide high-quality, cost-effective inpatient and outpatient care for all patients with a particular focus on acute, high-risk and senior populations.  In addition to providing hospitalist, ICU and physician advisory services at more than 50 hospitals, facilities and clinics, ApolloMed provides medical management and care coordination for more than 1,000 physicians and tens of thousands of patients through its value-based, results-driven solutions. ApolloMed has been providing the solutions that lead to measureable results for nearly a decade and has core networks in California, Ohio and Mississippi.

ApolloMed is successfully capitalizing on changing healthcare dynamics:  ApolloMed’s goals are aligned with the current industry dynamics of providing high-quality, cost-efficient healthcare services.  Healthcare costs currently top $2.7 trillion in the U.S., representing about 18% of the total U.S. GDP, with more than 50% going to hospitals and physicians.  These costs continue to rise, driven in part by increasing numbers of older Americans who account for high levels of healthcare expenditures, and by more Americans gaining healthcare coverage under the Affordable Care Act.  Fee-for-service healthcare plans lead to inefficiencies based on the absence of a comprehensive, integrated approach.  Health plans are moving away from the fee-for-service framework to a more integrated accountable care model.  ApolloMed has the capability to assume a full range of financial risk offerings.

ApolloMed has a proven ability to grow healthcare networks:  ApolloMed offers inpatient and outpatient solutions and has undergone rapid growth by building networks that include hospitalist services, Accountable Care Organization (ACO), independent physician associations (IPA) and outpatient clinics.  The company is validating its model by developing partnerships with industry leaders, including Fresenius Medical Care for end-stage renal disease and a strategic partnership; Boehringer Ingelheim for COPD chronic care management; and Rite Aid for community-based health treatment for patients with chronic and poly-chronic conditions.

Driving revenues through “Best in Class” medical management and operational efficiencies:  ApolloMed provides the management and data analysis infrastructure to support improved case management and physician-led programs.  The company’s incentive are aligned with physicians and hospitals.  Its financial risk offerings include Low Risk through traditional contract billing or physician staffing through hospitalists services and clinics (more than 80% of fiscal 2014 revenues); shared savings through its ACO, which is a 50/50 split in cost-savings with Medicare (ApolloMed showed a $3.1 million preliminary interim cost savings with potential distribution in 2H14); and partial and full Risk through its IPAs. This is a capitated model with health plans providing a per-member/per-month fee and ApolloMed’s IPA assuming all responsibility for patient care and financials.

ApolloMed is positioned for aggressive growth through its defined strategy.  The company strengthened its balance sheet to support growth through a strategic investment from partner Fresenius Medical Care for up to $12 million announced in April 2014.  The investment includes $2 million in equity at $1 per share, which is 2Xs the current stock price.  The company is focused on strategic acquisitions and partnerships that expand its network and service offerings.  The company is also looking to improve the economics of its ACO and IPA through its increasing scale.  The company has developed a platform and infrastructure that can be replicated in additional geographies. 

ApolloMed is physician led by Chief Executive Officer Warren Hosseinion, M.D., who founded the company with Chief Medical Officer Adrian Vazquez, M.D. in 2001.  Recently the company announced the appointment of Mitchell R. Creem as CFO, who is a seasoned healthcare executive with more than 30 years of industry experience, including CEO for the Keck Hospital of USC and USC Norris Cancer Hospital and Associate Vice Chancellor and Chief Financial Officer for the UCLA Medical Science.  Senior management is rounded by Chief Strategy Officer Mark Meyers, who has more than 30 years of healthcare experience and is the former Senior Vice President of Operations for Dignity Health.

This blog contains certain forward-looking statements with respect to Apollo Medical Holdings, Inc.  Forward-looking statements are statements that are not descriptions of historical facts and include statements regarding management's intentions, beliefs, expectations, plans or predictions of the future, within the meaning of the Private Securities Litigation Reform Act of 1995. Because such statements include risks, uncertainties and contingencies, actual results may differ materially and in adverse ways from those expressed or implied by such forward-looking statements. Additional information concerning Apollo Medical Holdings, Inc. and its business including additional factors that could materially and adversely affect its financial results including, but not limited to, the risks described in its annual report on Form 10-K and in other filings with the SEC.

Carbo Ceramics ( NYSE - CRR ) -- Opens the Hole

Carbo Ceramics (CRR - $140) is the leading producer of ceramic proppants used in oil and gas fracking.  Today's horizontal drillers crack open underground rock formations to retrieve oil and gas.  The proppants keep those fractures open under extreme pressure.  Many land based wells are 8,000-10,000 feet deep.  Carbo has experienced a series of ups and downs over the years.  Natural gas prices collapsed a few years ago, causing overall activity to fall.  During a boom prior to that proppants fell into short supply, encouraging a swarm of Chinese competition.  The hoopla over fracking has generated competition in South America and elsewhere, too.  Most of those operators hoped to cash in on local energy projects.  International development has been slow to emerge, though for geological, political, and economic factors.  Some of that material gravitated to the United States, as well.

Carbo mounted a campaign to illustrate its products' price performance advantage.  That took some convincing.  Fracking operators have been focused on reducing costs to compete with "black oil" producers like the Saudis in the event an over supply condition arose.  That remains a primary emphasis.  But Carbo has persuaded a growing number of producing companies that its products may cost more, but they generate far more production than Chinese and other lower cost alternatives.

A new manufacturing technology could separate Carbo from the pack even further.  Its new Kryptosphere line is designed for extremely deep offshore deposits.  Huge oil and gas reserves are believed to exist offshore.  Standard straight down drilling, like the Horizon rig used before it exploded, is economic.  But horizontal fracking offers even greater rewards.  Up to now nobody had the proppants to make it feasible.  Carbo currently is demonstrating the new line to prospective customers.  Commercial introduction is scheduled for 2015.  A similar but less expensive version is being prepared, as well, for land based wells.  Pricing details remain secret.  But Carbo is intimating that costs won't be much higher than its existing products despite the performance improvement.

Meantime, poor weather affected Q1 financial results.  Drilling in North Dakota was stymied, reducing proppant demand.  Railroad bottlenecks contributed further problems.  Even so, earnings rose 6% on a 1% sales gain.  Sequential improvement is likely in upcoming periods.  Oil drilling remains robust.  Natural gas prices surged over the winter, moreover, and appear to be holding up at attractive levels.  That could encourage greater drilling activity.  The Obama Administration remains adamant in its opposition to LNG (liquified natural gas) exports.  That policy might change after the 2016 election, though, both for economic and geopolitical reasons.  Long term, international fracking promises additional leverage.

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Zix ( Nasdaq - ZIXI ) -- Building a Secure Future

Zix (ZIXI $3.35) is a leading provider of e-mail encryption that protects sensitive information during transit.  The company sells its technology on a recurring revenue basis.  Customers who send encrypted messages pay the company approximately $20 a year per user for unlimited messaging.  Recipients can receive encrypted e-mails without charge by registering in the company's directory.  Any code can be broken if sufficient computer horsepower is applied.  From a practical standpoint, though, Zix's technology is safe from hacking.  Healthcare and financial institutions represented 72% of revenue in the latest quarter (March).  Renewals represent about 90% of revenue.  The renewal rate is approximately 100%.  New seats at existing customers offset losses.  Organic growth is 10%-15% a year.

A re-seller agreement with Google has caused performance to slow.  The huge search engine provider also sells an anti-spam and virus protection service to corporate clients.  It licenses Zix's email encryption technology to include in the bundle.  Google reorganized that service early in 2013.  A variety of back-end issues arose, causing sales of Zix's products to decline from 20% of Zix's annual sales to less than 10% in the latest quarter.  The infrastructure appears to have been reestablished.  But Google still is handling new orders by hand, for select large accounts, rather than through automation.  The system is ready to be turned on again.  But it remains to be seen when the Google channel will resume full speed.

A high potential new product remains in an early stage of development.  Last fall Zix launched a cloud based "bring your own device" (BYOD) security package.  The software allows employees to use their personal phones to send and receive company email, without any of it actually being stored on the phone itself.  That way if the phone is lost no proprietary information is jeopardized.  Several alternative technologies already are on the market.  Those are software packages that reside on the phone.  Besides creating privacy issues, pricing is higher because different software has to be written for hundreds of phone models.  Zix's is a single platform that operates in a cloud computing format.

Only 68 companies have been signed up to date.  Most still are in the testing stage.  Pricing is similar to email encryption, around $20 per user per year.  Zix boosted its sales force by 40% last year to get the new "ZixOne" line rolling.  A large number of evaluations are underway.  If the technology gains general acceptance the user population could jump into the millions, similar to encryption.  Margins could widen on the incremental volume, moreover, leading to superior earnings gains.

For now, the Google problem combined with the uncertain "ZixOne" rollout has exerted pressure on results.  Earnings probably will decline modestly in 2014 due to the greater sales effort.  Even if new business is generated Zix's recurring revenue model will spread those payments out into the future.  Revenue is recorded as earned, month by month.  Success could lay the groundwork for superior growth in future years.  If the new line pans out and Google gets back in gear, sales could attain $75-$100 million in 2-3 years to provide fully taxed earnings of $.20-$.30 a share.  Our advice is to wait for a lower entry price or more clear cut proof that "ZixOne" will realize its potential.

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