1 Main Capital, a long-biased investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A net return of 21.2% was recorded by the fund for the year end 2020, outperforming both its S&P 500 benchmark that returned 12.5 and the Russell 2000 index that returned 9.4%. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
1 Main Capital, in their Q4 2020 Investor Letter said that The Joint Corp. (NASDAQ: JYNT) is part of their top 5 holdings. The Joint Corp. is a company that operates chiropractic clinics and it currently has a $484.9 million market cap. For the past 3 months, JYNT delivered a decent 86.70% return and settled at $32.53 per share at the closing of January 29th.
Here is what 1 Main Capital has to say about The Joint Corp. in their investor letter:
“The Joint (JYNT) is a rapidly growing franchisor (~90% of locations) and owner (~10% of locations) of nearly 600 chiropractic clinics across the U.S. that operate on a private-pay, cash-based model. The company was founded over 20 years ago, with the vision of improving the quality of life for its customers through routine chiropractic care that is convenient, affordable, and patient-centric.
Driven by a focus on customer satisfaction, JYNT has made it more convenient for patients to see doctors at its clinics than at traditional practices. The company’s locations are clean and modern-looking, wait times are typically short and ancillary products and services are not aggressively pushed to patients.
The company’s simplistic model is also a win for its staff; doctors can concentrate on patient care while administrative staff can focus on customer service and scheduling rather than them both having to deal with complex insurance contracting, documenting, billing, and collecting.
This efficient operating model allows JYNT doctors to see nearly 3x the number of patients compared to traditional competitors. In turn, the company can price its services well below typical levels. In fact, most patients would pay more in insurance co-payment at a traditional chiropractor than they would in total if they just went to a JYNT clinic and paid fully in cash, where the average spend per visit is $29.
Now, if it is better for patients, better for employees and cheaper than the competition, the unit economics must suck, right? Well, not quite.
A typical corporate location generates greater than 50% ROIC and has a payback of less than 3 years. Each unit requires an investment of approximately $235k, including $180k of build-out costs and $55k of first year losses. However, by year 3 the location generates roughly $500k of revenue and $130k of operating profit. Not too shabby.
For franchisees, units generate greater than 35% ROICs and paybacks of approximately 3.5 years, after considering the added $40k per-location franchise fee and 7% royalty on gross sales. Also quite strong. Despite its largely franchised model, the company has been largely unprofitable until very recently, as it has invested in corporate infrastructure to support its growth ambitions. However, in 2019 the company finally stepped over these corporate investments and started to generate earnings that are now being used to aggressively expand the corporate-owned store base.
Given the compelling economics outlined above, the rapid acceleration of corporate-owned stores should lead to significant growth in future earnings and free cash flow that is not yet fully appreciated by investors.
In the coming 3-5 years, I anticipate that JYNT will grow its owned units by 2-3x, while the franchised location count should continue to grow at a double digit CAGR. In this scenario, I expect that JYNT will grow its EBITDA and EPS by over 5x current levels to more than $50 million and $2, respectively.
Importantly, the growth outlook for the company will likely remain quite bright well beyond this projection period, as the company will still be underpenetrated relative to the 1,800+ clinics management believes it can build in North America and compared to the broader North American market which is comprised of ~50k chiropractic clinics.
Despite JYNT’s appreciation from the Fund’s average cost of approximately $17 per share, I believe there continues to meaningful upside to the shares as the company continues to execute against the growth opportunities in front of it.”
Last December 2020, we published an article telling that The Joint Corp. (NASDAQ: JYNT) was in 17 hedge fund portfolios, its all time high statistics. JYNT delivered a massive 111% return in the past 12 months.
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Disclosure: None. This article is originally published at Insider Monkey.