MedAssets stock performance and financial decline from 2007 to 2011

Financial Analysis of MedAssets

Company Overview

MedAssets Inc. is an organization that provides technology enabled product and service to mitigate the financial instability facing the healthcare providers across the United States. The company has assisted many healthcare organizations to increase their net revenue between 1 and 3% and decline the costs by 3 to 10%. Through the company efficient operation, MedAssets has assisted 4,000 hospitals, 180 health systems and 90,000 non-acute healthcare providers to control costs and optimize operational efficiency. The company was incorporated in 1999 with headquarter in Alpharetta in Georgia. Typically, the company provides a streamlined solution to improve the operating margin and cash flow of many healthcare providers in the United States.

"Over time, MDAS has evolved into a comprehensive health care technology and services provider. This transition was fueled by organic initiatives and a strategic series of acquisitions. Currently, MDAS offers hospitals and other health care providers value through solutions geared towards revenue, profitability, and cash flow enhancement." (Donohue, 2009 P. 1)

MedAssets uses the technology-enable solution to implement consulting and outsourcing service for wide range of healthcare providers across the country. Through company business activity, MedAssets has been able to increase its total revenue in the last 5 years. The company increases its total revenue from $391 Million at the end of the 2010 fiscal year to $578 Million in 2011. Despite the increase in the revenue in the last 5 years, the company suffered a decline in the net income at the end of the 2010 and 2011 fiscal years. In 2009, the company recorded $20 Million in net income, however, the company recorded a loss of $32 Million in net income at the end of the 2010 fiscal year and $15 million net income loss at the end of 2011 fiscal year. With a decline in net income, MedAssets recorded a decline in the stock performances from $20.19 to $9.25 between 2010 and 2011

The objective of this report is to discuss the strategy MedAssets implements to use the financial instruments such as stocks, and derivatives. The report provides the historical price of MedAssets to enhance greater understanding of MedAssets stock performances in the last 5 years.

Total Equity U.S.$ Million

Several factors led to the decline of MedAssets stock price in the last 4 years. First, the U.S. financial crisis that starts from 2008 led to the decline of stock performances of many companies. The financial crisis occurred because of the collapse of mortgage institution in the United States. Before 2008, the mortgage banking institutions offered loans to people with bad credit history due to high interest rates. However, in 2007, the interest rates declined and the issue led to the drastic decline in the mortgage value. Many homeowners were unable to repay their loans and the whole issue triggered the present U.S. financial crisis. The effect of the financial crisis is widely felt by the banking institutions because many banking institutions were short of liquidity. After 2008, the effect of the credit crunch is transferred to the non-banking institutions, and the stock price of many organizations deteriorated because of the present U.S. financial crisis. (Clare,2010). Likewise other corporate organizations, MedAssets stock showed a decline in performances in 2008. Although, the MedAssets stock price improved between 2009 and 2010, however, the company stock deteriorated in 2011. The stock price fell from $20.19 in 2010 to $9.25 in 2011 revealing 118% decline in the stock returns. Typically, MedAssets stock value has not yet recovered to its level of 2010. Presently, the company stock price is $12.33.

Another factor leading to the decline in the MedAssets stock returns is the market competitions. MedAssets is facing a stiff competition from several healthcare technology enabled providers. However, direct competitors of MedAssets are Accretive Health, Inc. Allscripts Healthcare Solutions, Inc. And McKesson Corporation. Data in Table 2 reveal that the MedAssets is behind its competitors with reference to their market capitalization. Additionally, Accretive Health, Inc. And Allscripts Healthcare Solutions, Inc. are ahead of MedAssets in term of the total revenue. The company is also lagging behind its competitors in the earning-per-share.

Table 2: MedAssets Direct Competitor Comparison

Direct Competitor Comparison

MedAssets, Inc.

Accretive Health, Inc.

Allscripts Healthcare Solutions, Inc.

McKesson Corporation

Industry

Market Capitalization:

1.04B

2.12B

21.22B

39.81M

Employees:

3,040

2,721

6,300

37,700

Quarterly Rev Growth (yoy):

14.80%

55.00%

8.80%

9.90%

10.30%

Revenue (ttm):

1.47B

54.89M

Gross Margin (ttm):

79.50%

22.52%

44.89%

5.38%

50.53%

EBITDA (ttm):

58.77M

2.88B

3.25M

Operating Margin (ttm):

13.21%

5.46%

10.93%

1.90%

3.96%

Net Income (ttm):

30.50M

66.81M

1.40B

N/a

Earning Per Share (ttm):

0.01

0.30

0.35

5.59

0.01

price-to-earnings (ttm):

2,055.00

35.57

31.66

16.13

24.38

price/earnings to growth (5-year expected):

0.82

0.78

0.96

0.88

1.47

Price to Sales ratio.

1.20

1.26

1.42

0.17

1.51

Source: Yahoo Finance (2012).

Overview of the MedAssets stock returns compared to S&P 500 index reveals that MedAssets stock does not generate stock returns compared to S&P 500 index. Data in Table 3 and Fig 2 reveal the three-year comparison of MedAssets stock returns and S&P 500 Index the comparison of the s MedAssets stock returns and S&P 500 index reveal that MedAssets relative performance is lower than S&P 500 index. Based on the 3-year annual return, the company records -9.98% and S&P 500 index records +15.26%.

Table 3: MedAssets stock returns compared to S&P 500 Index

MedAssets

S&P 500 Index

Year to Date (ytd) return

+31.46%

+7.62%

1 Yr Return:

(-23.86%)

+1.17%

3 Yr Ann. Return:

(-9.98%)

+15.26%

50 Day Moving Average:

13.09

Change of 50 Day Moving Average

(-7.1%)

(-2.31%)

200 Day Moving Average

11.2

Change of 200 Day Moving Average:

+8.54%

+5.94%

Source. Hedgeable, 2012.

Fig 2: MedAssets stock returns compared to S&P 500 Index

- MedAssets Inc. (MDAS)

- S&P 500 INDEX ($SPX)

- Healthcare

MedAssets Derivatives Implementation

To satisfy the company business operations, MedAssets raises a significant amount of loan bearing interests from banks. By December 2010, the company raised an outstanding borrowing that worth $635.0 million, and the term of loan bears the interest rates of 1.5% plus the applicable margin. Additionally, the company has issued outstanding principal amount of the company bond worth $325.0 million which carries the interest of 8% per annum. Bonds are the notes issued to raise fund from the public. Bonds are inform of debts because they carry interests and should be repaid when they reach their maturity. MedAssets issues long-term debt to raise fund from the public. The long-term debts are the financial obligation lasting more than one year, which a company must pay at its time of maturity. Other type of securities is the commercial paper, and short-term notes issued by the company. However, this kind of notes is short-term because their maturities are less than one year. By May 2012, MedAssets long-term debts are approximately $959.94 Million.

Additionally, MedAssets secures loans that carry interest rates. With significant amount of loans that the company has secured and notes that the company has issued, the company faces interest rates risks. To mitigate the effect of risks associated with the fluctuation of the interest rates, the company enters into the series of financial instrument to guide against the risks from the loans agreement and the bond that company has issued in order to raise fund.

Due to the interests rates fluctuation, MedAssets faces the interest rates risks that could jeopardize its business operations. Typically, MedAssets faces interest rates under the borrowing agreement. A loan under the credit agreement carries the interest rates. To safeguard against the fluctuation of the interest rates, the company policy is to manage the interest cost using cost efficient method. The company enters into financial derivative to manage these risks. The company uses major capital market such as hedging and derivatives to manage the fluctuation of the interest's rates from loans and bonds. To manage the complexity of the interest rates, the company uses interest rates swap. The company also uses hedging and derivatives to reduce the impact of the interest rates on the shareholders equity. The company risk management objective is to use the interest rates swap to manage the interest rates associated with loans that the company has secured. More importantly, the company also enters into the equity derivative contract to manage the change in the market performance. Additionally, the company enters into the fair value hedging to reduce the exposure of the company assets to change in fair value. The company also enters into the cash flow hedge to reduce the impact of interest rates on the cash flow.

On January 1, 2009, MedAssets entered into the GAAP adopted hedging and derivatives. The company enters into the interest rate swap that amounted to $138,276 starting from June, 30 2010. On May 5, 2011, the company entered into the derivative instruments of 3% LIBOR interest rate cap. On the same year, the company entered into the three separate forward interest rates swap that carries 3-month LIBOR of 2.78%. The company uses the interest rate swap for the cash flow hedging relationship. Meanwhile, the company treats the interest rate cap as hedging as being defined by the GAAP hedging and derivatives policy. By December 31, 2011, the company recorded the interest rates swap in its balance sheet for the company valuation technique; MedAssets uses the swap for the cash flow because the company uses hypothetical LIBOR rates to project the cash flow. To guide against loss during the contract agreement, the company uses the swaps to assess the creditworthiness of each partner during the contract agreement. The strategy is to guide against the default that might have occurred during the agreement. (Donohue, 2009).

Based on the strategy that the company employs in the implementing contract agreement using swap technique, the company has been able to generate the positive cash flow. Typically, the company has been able to carry out the effective interest rate swap arrangement and by December 31, 2011, MedAssets was able to carry out the interest swap arrangement. However, the company has not recorded profit or loss from the interest rates swap arrangement as of December 31, 2011. Added to the loan agreement that the company has entered into over the years in order to raise fund for business operations, MedAssets also issue bond debts to raise fund from the public.

Conclusion

Comprehensive analysis of the stock performances of MedAssets reveals that the company stock returns has depreciated in the last 4 years. It was in 2007 that the stock price reached its peak. However, the company has recorded a decline in the stock returns since 2007. Major factors leading to the decline in the stock returns have been attributed to the present U.S. financial crisis and stiff competitions that the company is facing. The report also discusses the financial instruments that the company employs to mitigate the effect of the fluctuation of the interest rates. The company use derivative and hedging to reduce the impact of interest rates on the loans secured by the company. The report suggests that the company needs to implement an aggressive marketing plan to improve the company stock returns.