Description

Based in Kentucky, Quipt is the 5th largest home medical equipment (HME) provider in the US, providing mostly respiratory equipment (79% of business) and consumables to patients in a home setting.  They currently operate out of 125 locations across 26 states.  xds68 wrote up QIPT in May of 2022 and I'd point you to that writeup for background information, especially on the reimbursement rate environment that continues to be benign.  xds closed out of the position as they mentioned they had underestimated the capital intensity of the business.  The company is dual listed in Canada and the US, and is a Sedar filer (a bit more on this later).

Two years after xds' writeup, the stock price is down 4%, the share count has gone up by 26% (shares issued to fund M&A), and debt has jumped by $70mm.  Here's a chart laying things out:

Back in 2022, the pitch was a reasonably priced roll-up story.  The stock has been penalized due to:

1. Worries that GLP-1s will reduce incidence of sleep apnea and reduce the demand for Quipt's equipment
2. The Valentine's Day disclosure that they received a Civil Investigative Demand (CID) regarding potential for false claims to government healthcare programs for CPAP eqipment.

On the first point, I'd recommend you talk to the company.  They are seeing absolutely no impact on their business from GLP-1s.  In fact, with an estimated 24 million suffering from undiagnosed sleep apnea, the company believes that those taking GLP-1s are more likely to take a hollistic approach to health and enroll in sleep studies, etc.  ResMed, one of the largest CPAP machine manufactures did a study which they spoke about on their FQ2 conference call on 1/24:

On the second point, here's the language around the CID:

From time to time, the Company is involved in various legal proceedings arising from the ordinary course of business. The Company received a civil investigative demand from the U.S. Attorney’s Office for the Northern District of Georgia pursuant to the False Claims Act regarding an investigation concerning whether the Company may have caused the submission of false claims to government healthcare programs for CPAP equipment. The Company is cooperating with the investigation and the DOJ has not indicated to the Company whether it believes the Company engaged in any wrongdoing. No assurance can be given as to the timing or outcome of the DOJ’s investigation.

There isn't a ton that could be shared with the market on the call, or in callbacks, because there's no actual accusation (not yet!) of wrongdoing.  There's also no knowledge of what the impetus of the investigation was (e.g. whistleblower or otherwise).  While scary on its face, I think the market is conflating risk with uncertainty of outcome.  The Canadian sell-side firms that cover the name have done a decent amount of work uncovering similar settlements among DMEs (as CID's are very common in this industry).  Their conclusions are that precedent indicates a no more than a mid-single digit millions dollar fine.  Given what was otherwise a very solid quarter, and the stock price reaction since earnings, I'd guesstimate the market's penalized them to the tune of about $30mm already.

At 2.75x forward consensus EBITDA, and organically growing, the company is just too cheap.  But it also clearly no longer has any kind of equity currency to do larger deals with.  And management knows this.  So, I posit, QIPT will essentially optimize for FCF on the platform they've got, do small tucks ins if anything at all.  The case for buying mom & pops that have very little in the way of a technology stack (Quipt does remote equipment monitoring, automatic replenishment of consumables, etc.) is still compelling.  In addition, the company is very close to being majority owned by US institutions, and I believe for FY 2025 (beginning in the December quarter of this year), the company may be in a position (which they tell me they'd definitely opt for) to elect to file 10-Ks and Qs instead of 20-Fs.

QIPT used to tell investors they were targeting FCF at 3-5% of revenues, now they tell investors to think about 6-8% conversion.  In the last quarter they put up 10%.  When I push the team on what would cause this to move back down to the 6-8% range, I think they acknowledge there's nothing super specific, other than they'd prefer to beat expectations.

The CEO seems capable. He's been great at leading M&A integration in the space and owns 11% of the stock.

A note on Adj. FCF calculations: because the company utilizes equipment leasing arrangements, they calculate FCF as: Adjusted EBITDA less rental equipment transferred from inventory (akin to capex), less lease payments.  For FQ1, that's $15.3mm - $7.3mm - $1.5mm = $6.5mm.    I calculate gross debt as their CIT facility + Equipment Loans + Leases.

Catalyst

• Eventual conclusion of CID matter (either no impact or, what I expect to be a fine in line with other DMEs that have settled)
• Potential shift to filing SEC financials (Q & Ks) instead of on Sedar
• Continued organic growth quieting skeptics that believe this is just an inorganic roll up story
• FCF generation used to continue to de-lever
• Potential for Philips to come back to the CPAP market which would perhaps give Quipt some cost leverage on equipment