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.

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