The once-booming stock price ofĀ CRH Medical Corp.Ā (TSX: CRH) has dropped more than 50% over the past three months, plungingĀ the market capitalization of the Canada-based gastrointestinal healthcare company from a peak of more than $1 billion in April to just above $400 million today.
I have written about CRH a number of times before, urging caution with investors who may have become enamoured with the seemingly incredible growth prospects of this acquisition-focused firm.
In mid-April, around the time the company’s initial slide began, I called CRH Corp. a “Valeant 2.0” due to the company’s unique acquisition model and accounting practices.
In May, I cautioned investors about large sales of stock by company insiders (totaling more than 1% of the float at the time), noting that while insider selling in most publicly traded firms is common, sales of this magnitude should be taken into consideration by investors as a red flag moving forward.
In this article, I’m going to touch a bit more on the recent investor road show CRH executives have been on as well as subsequent insider selling of CRH stock.
On June 28, director David Johnson sold an additional 30,000 shares around the $7.50 level, further reducing the director’s exposure to CRH shares (previous stock sales highlighted in my previous article).
Mr. Johnson and CEO Edward Wright have sold large stakes of CRH stock over the past months, while also engaging in an investor roadshow over theĀ same time frameĀ in an attempt to encourage new equity investments in CRH.
During the most recent quarter, Mr. Wright and CFO Richard Bear have met with investors in Toronto, Montreal, and the U.S. in a roadshow hosted by Bank of Nova Scotia, CIBC, and Canaccord.
The company has been very vocal about efforts to engage outside investors, highlighting several conference calls with Canadian and U.S. investors as well as several one-on-one meetings with existing and prospective investors.
With insiders selling while simultaneously looking to raise money via an investor roadshow, the red flags I cautioned investors about before have not dissipated and have become more pronounced.
Should additional equity issuances come out of this roadshow, current investors can expect to have their portion of overall earnings (which has already been significantly impacted by the acquisition structure of CRH) diluted further, potentially negatively impacting the value of their shares.
While any equity potentially raised could be put to use via acquisitions, I remain skeptical of the long-term value of many of the recent acqusitions made by CRH, as I am not convinced these acquisitions have provided shareholders with sufficient value to justify the current debt load, given that most of the acquisitions are really equity investments rather than true acquisitions.
Bottom line
CRH Corp. remains one company I would recommend extreme caution with. This firm remains a highly speculative play due to its underlying business model and balance sheet.
Stay Foolish, my friends.
