Is Premier Stock Undervalued?

Premier, Inc (NASDAQ:PINC) is not a well-known company. Some would go so far as to say it’s completely unknown by all but those in the healthcare industry, where it actually holds a dominant market share in getting hospitals the supplies they need.

In essence, Premier negotiates contracts for medical supplies and pharmaceuticals on behalf of its organizations, which include hospitals and health systems, as well as other healthcare providers. The company’s collective bargaining power ensures members benefit from lower costs and access to necessary products.

Over time, Premier has expanded from being a simple Group Purchasing Organization to offer performance improvement systems that are aimed at enhancing the performance of healthcare firms, and supply chain solutions to help them in areas ranging from sourcing and procurement to logistics and inventory management.

It’s an interesting and stable business in a world where AI hype and technology titans garner headlines, so what about the stock, is it a buy?

The Bull Case for Premier 

Although Premier started out as a straightforward Group Purchasing Organization, it has expanded to Supply Chain Solutions and Analytics and Advisory Services, creating a broader stream of revenues that hit $318 million last quarter alone. 

Over the past 5 years, the company has consistently reported a run rate of over $1 billion and better yet, last year’s earnings before interest and taxes hit a 5-year high of $386.5 million.

One reason for the firm’s growing success it its investment in technology platforms like PINC AI™ that harness data analytics to help healthcare providers make more informed decisions that enhance patient care and improve operational efficiency.

The customization of these solutions is another key factor that allows Premier to serve the various needs of different healthcare providers. For example, they can help with continuous monitoring and improve healthcare practices that help to maintain high standards of care.

Perhaps the company’s greatest intangible asset now is its extensive member base that includes a wide range of healthcare providers ranging from large hospital systems to individual healthcare facilities.

The result is a broad market for its services and also a rich data pool that is key to building valuable insights and analytics needed to understand trends and outcomes as well as to identify areas for improvement.

Above all, it also enables Premier to negotiate powerfully with suppliers, leading to better pricing and terms that benefit members.

In short, Premier’s network underpins its revenues and also enhance its market intelligence, but is the stock a bargain?

Is Premier Stock Undervalued?

According to 8 analysts, Premier is marginally undervalued at this time by 4% with a price target of $23.88 per share.

Interestingly, though, a discounted cash flow forecast analysis suggests much greater upside opportunity exists with fair value as high as $33.86 per share.

Indeed that analysis assumes a 5-year DCF but a 10-year forecast puts Premier even higher at $44.67 per share.

Further confirming the valuation thesis is Premier’s P/E ratio that resides now at 15.3x, a reasonable figure particularly given how the quality of the firm’s historical earnings is high.

With that said, six analysts have revised their earnings downward for the upcoming period.

Is Premier Stock a Buy?

While analysts and a cash flows analysis don’t necessarily agree on fair value, there are some other things that may tip the balance in favor the DCF analysis.

For one, Premier has a high shareholder yield of 16.8% and it also has a high return on invested capital of 11.6%.

Also attractive is Premier’s dividend of 3.71%, a substantial enough yield to entice income-seekers, particularly those who want a reliable payout. The payout ratio of just 56% offers that comfort in the $0.84 per share annual payout being sustainable.

The consistency of top line revenues is also a sign that Premier can withstand periods of boom and bust alike. Over a five year period when healthcare scares, a 20% market downturn and a 25% bull market all took place, Premier essentially held its top line steady as a rock.

That stability translates to the share price too which shuns the typical price volatility associated with technology firms and high growth enterprises.

It’s not as if management sits on their laurels enjoying the steady flow of revenues without attempts to expand, though. That’s evident from its acquisitions, such as of Stanson Health, to integrate advanced clinical decision support tools into Premier’s offerings.

The company’s various acquisitions allow Premier to tap into new customer segments and offer more diversified services.

Wrap Up

Premier, Inc is by no means a well-known healthcare firm but it is a foundational enterprise in the healthcare system, and is heavily relied upon by hospital systems. That in turn leads to highly predictable revenues that should remain stable for the foreseeable future.

Indeed, analysts forecast revenues will rise from $1.3 billion this fiscal year to $1.6 billion within 3 years. Of greater note is how earnings before interest and taxes are estimated to rise from $256 million to $463 million over that same time frame. So too is the dividend expected to rise from $0.87 per share to $0.95 per share. 

The combination of a high shareholder yield, attractive ROIC, solid dividend and stable business model all combine to make Premier a highly attractive investment, particularly if the economy runs into choppier waters over the next year or so.

While it’s not a stock that will surprise too often on the upside, it equally is unlikely to cause investors a whole lot of disappointment on the downside. Rather, Premier is an attractive stock for conservative investors.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.