Press Ganey Holdings, Inc. (PGND, Financial) is the leading provider of patient experience and employee engagement measurement and improvement solutions for health care organizations. The foundation of the business is its proprietary data set, which it collects from surveying patients, doctors, nurses, administrators, and employees about their in-hospital experiences. Surveys are mandated by regulators, but Press Ganey works with clients to supplement requirements with additional inquiries to generate useful information. In 2014 alone, they distributed over 100 million surveys and got back about 20 million responses. Press Ganey creates a contributory database from the data (which it owns), analyzes and standardizes its findings, and delivers to its clients their standing along with actionable recommendations to enhance patient experience and employee enjoyment in order to enable better medical outcomes and financial results.
We believe that the health care marketplace is becoming more consumer driven/ more patient-centric and that Press Ganey is positioned to benefit. Individuals and insurers are becoming more educated about the quality of providers and the cost of care, and the better providers will get increased volumes and better reimbursements. Press Ganey’s “CAHPs” (Consumer Assessment of Healthcare Providers and Systems) scores will inform patients of quality and be used under the Affordable Care Act to reimburse for quality. We expect demand for services provided by Press Ganey’s expanded survey and ancillary implementation products will grow at an accelerating rate.
Press Ganey is the established leader in the space, with over 65% market share, and has been gaining share of late. We believe the company has a sustainable competitive advantage, primarily because of the size and the quality of its critical comparative database. The company also has a terrific reputation for service and innovation.
The company’s business model is very attractive. They sell on a recurring revenues model, and have a 97% client retention rate, which leads to great sales visibility. The profit margins, as measured by adjusted EBITDA, are exceptional at 36%. We think they can expand lots from here. Capital requirements for the business are modest, so cash flow generation is significant. The company has been growing organically at high single digits. Though they are estimating it will continue at that pace, we believe that could prove conservative because of the tailwinds in the business and adoption of new service offerings. We believe the company will likely use its ample free cash flow and under leveraged balance sheet to do accretive acquisitions to enhance offerings and boost revenue growth.
We believe the stock trades at a fair valuation, 12 times Street estimates for next year’s cash flow. It is hard to find great businesses that are cheap these days. Yet, we see great opportunity to make lots of money in the stock because we believe EBITDA will compound at mid double digits, that the cash generated will add value through its use in acquisitions or debt paydown, and that the trading multiple could very well expand.
From Baron Funds’ second quarter 2015 commentary.
