As an investor, my preference is to find long-term macro trends and invest alongside of those trends. Unfortunately, the current market tends to overvalue the companies participating in these trends, giving me fewer opportunities to find attractive trend-based investments. However, that hasn’t stopped me from searching and occasionally finding a real interesting one.
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
An increasing percentage of the population is aging and this often leads to chronic pain. Treatment with various opioids has led to an addiction epidemic that shows no signs of abating. Of course, there are other methods for treating chronic pain, such as chiropractic treatment, but public acceptance of chiropractors is still in its infancy—particularly amongst people older than 50—the people who often suffer from chronic pain in the first place. I don’t want to debate if chiropractors help or not—what’s important is that many people who have tried chiropractic treatment believe that it helps and have become recurring patients.
Unfortunately, most chiropractors are not set up to really serve their customers. Their hours and scheduling are inconvenient and rigid, costs of use are prohibitive and procuring insurance reimbursements is difficult for patients. The Joint (JYNT – USA) is a chain of Chiropractors with over 370 locations in the US, that is growing rapidly through a franchise model. The Joint is substantially cheaper at $18 a visit (when on a monthly plan) than most chiropractors, and offers walk-in appointments making it substantially more convenient for patients. This has led to explosive growth with system-wide positive comp sales of 19% in the first quarter of 2017—which is pretty much unheard of for a franchised business. Even 4-year old locations are comping positive 11%. At the same time, the number of locations has been growing at over 20% a year. You basically have two growth avenues, comparable store growth and unit growth—both occurring simultaneously.
So, why are shares cheap today? New stores are un-profitable during the first year as the customer base grows. Big cash flow doesn’t come until the third year. During 2015, the company started opening corporate stores in addition to franchise stores. Unfortunately, given the young age of most corporate locations, they’re subtracting earning power from the substantial earnings of the overall franchise business. As these corporate stores mature, they will go from losing money, to substantial profit centers and I believe the company’s value will see a very substantial re-rating.
New management has been in place for almost a year now. They have dramatically cut costs and have ceased opening corporate stores—until the existing store base matures and becomes profitable. This is predicted to happen by year end.
Unlike many of my picks, there is some risk here as cash is somewhat tight and the company expects to continue losing money for at least the next two quarters before rounding the corner and becoming profitable. However, I gain confidence in them getting to cash flow positive, as the CEO and CFO have each purchased shares in the past few weeks.
Playing it forward a few years, I don’t see why this business cannot get to 1,000 locations with 15% of them being company owned and the rest franchised. Based on average store economics at the existing base, you have a very profitable business as franchised businesses tend to have rather high returns on invested capital. Meanwhile, company owned stores should have great 4-wall economics.
I don’t quite know how to value The Joint today, as it is money losing, but it does seem to be at an inflection point towards earnings. With a market cap of under US $50 million, I don’t feel like I’m paying much for the existing business that would be quite profitable, if not for the money losing corporate stores. More importantly, I have a rapidly growing, high return on capital business with a huge macro tailwind behind it.
Disclosure: Vehicles that I manage are long JYNT
Article by Adventures In Capitalism