Digirad (DRAD), at $5.09 [is] now far cheaper (just over 6x EV/EBITDA vs 7.5x EV/EBITDA) than it was when we originally purchased it below $4. The company recently reported upside to 4Q, and raised guidance for 2016. The company’s market cap is just $99 million, versus free cash flow that should be in the $11-12M range – a low double-digit free-cash flow yield – and pays a 4% dividend.
Digirad provides outsourced diagnostic imaging and ultrasound across 42 states. We think their future has little dependence on whether China grows 3% or 7% or oil is $30 or $90 a barrel (or US interest rates go up another 50bps). This is a management that we know well and trust. The good news is that they will be extremely disciplined and do acquisitions at 3-5x EV/EBITDA. Conversely the bad news is that we might go through an 18 month stretch with no new deals – however, we far prefer a management that doesn’t chase deals.
DMS Health is a far larger acquisition than the company has made previously, and importantly, management has been clear that’s its objective of “$17-18 million in EBITDA in 2016” does not rely on cross-selling or operational synergies…so the story could get better in future years as synergies are realized. With shares trading at just over 6x EV/EBITDA, low cost debt, and strong demographic growth trends we think DRAD offers a compelling risk/reward profile. We don’t know when the company will find the next DMS, but with a disciplined acquisition approach, interesting expansion/cross-selling opportunities, and almost $100 million in NOLs, we see DRAD as a multi-year compounder, before it (by our best guess) is ultimately acquired.
The above post has been excerpted from a letter of Dane Capital Management.
Disclaimers: Net of expenses for a Series A Investor invested in Dane Capital Management Fund LLC This document is prepared solely for informational purposes. This report is intended exclusively for the person to whom it has been delivered, and is not to be reproduced or redistributed to any other person without the prior written consent of Dane Capital Management LLC. Net Performance results are presented on a net-of-fees basis of a Series A and reflect the deduction of, among other things: management fees, brokerage commissions, administrative expenses, and accrued performance allocation, if any. A Series A investor incurs a 1.25% per annum management fee and a 15% performance allocation on net profits, if any. All dividends, interest and capital gains are reinvested. Individual investor net returns may vary from the net performance stated herein due to timing of specific investments. All information contained herein is estimated and unaudited. This document is not to be construed, by any means, to be an offering, solicitation, advertisement or marketing material to purchase securities or interests in the Funds. Such an offer will only be made by means of a final Confidential Offering Memorandum. You should review carefully the offering memorandum, including the description of the risks, fees, expenses, liquidity restrictions and other terms of investing in the Fund before making a decision to invest. All investments involve risk including the loss of principal. This document is not intended to be used by any investor, prospective investor or third party, and should not be relied upon in any way, to make or influence a decision with respect to an investment in the Funds. Past performance is not indicative of future performance.