PAUL JOHNSON
FOUNDER/PORTFOLIO MANAGER
NICUSA CAPITAL

COMPANY: Metropolitan Health Networks
TICKER: MDF (AMEX)
PRICE: $2.01 (as of 4 p.m. yesterday)
52-WEEK RANGE: $1.78-$3.30
MARKET CAPITALIZATION: $100.25 million

Paul Johnson is the founder and portfolio manager of Nicusa Capital in New York. Metropolitan Health Networks is a health care benefits provider based in Florida. Mr. Johnson spoke to David Dalley of The New York Sun about why he believes MDF stock could increase by 50% over the next 12 months.

What does Metropolitan Health do?

They operate two related businesses. The first is a provider service network, which is basically the doctoring side of an HMO. Specifically, they provide the doctoring and administrative side of the health network for Humana. Metropolitan Health has contracts with hospitals, doctoring groups, pharmacies, etc.They do that in three counties in Florida. The second business that they’ve now started is their own HMO under the name of Metropolitan Health.They operate in six Florida counties, and they’re expanding.

Why do you like the stock?

If you look at it from a valuation perspective, you’re essentially paying for the PSN only, and getting all the HMO efforts for free. HMO customers in the open market are worth about $3,000 to $4,500 per customer, and we estimate that it costs MDF around $1,500 to pick up a new customer through marketing. Right now, they’re approaching 3,000 customers, and within two years we estimate that they’ll exceed 10,000.

To understand this, you have to break up the businesses. There are essentially no analysts on the name,so for most investors, it’s more work than it’s worth. When you do, you have the PSN as a very profitable and stable business, worth about what the stock is currently trading at. When we do the sum of the parts, it’s worth more than the price.The HMO is currently running at a loss, but once they reach 7,000 customers, they’ll quickly become profitable and will start to take on real value in the market.

Why is now the time to get in?

Because the stock price has come down so much in the last six months, it’s a value play in a growing, well-managed company. Over the next period, people will continue to be impressed by the amount of new customers and new business MDF attracts.

What do you think the stock’s worth?

I project that at about this time next year, it’ll trade at around $3. It’s currently at around $2.03.

What are the risks?

First, that somehow the HMO doesn’t grow as fast as we think it will. Second, there’s the more ‘macro’ risk. Over the last three or four years, the current administration has decided that seniors should use an HMO instead of Medicare, and so has made it more favorable for them to do so by increasing the amount of money that it pays to HMOs. So the risk would be that those premiums stop growing or shrink, and that HMOs get squeezed.