It seems like a long time ago, but it was only last December when I said that Catasys Inc. (CATS:OTCBB) was a "Top Pick for 2018." That was at $3.50 a share. Since then, shares in CATS have rallied dramatically, reaching $14.29 just last month. It has truly been our top performing stock.
More recently, shares in CATS have retreated almost 40% September's highs. With the stock looking like it's at a nice support level, I spoke with management for an update. As per usual, I hung up the phone super excited about where this company is headed. So, for those who missed the first move, or sold in double digits, let me stress: this recent weakness represents an excellent buying opportunity.
What catalysts await?
Catasys is at an inflection point in terms of growth. Billings in Q2 were up 152% year over year, a number that is likely to be exceeded in Q3. How do we know this? Q3 of 2017 was a relatively flat quarter versus Q2, but July of 2018 (as relayed on the earnings call) was a record month. I fully expect to see billings of $6 million in the quarter, which would be almost 200% Y/Y growth.
More importantly, the company will be giving guidance for 2019 when they report earnings (which should be before Nov. 15). My model shows billings going to $48 million in 2019. I don't expect the company to guide to this number, as it has justifiably been conservative with its forecasts. I would not, however, be surprised to see a $40ish million number thrown out there. This would be roughly double 2018 and, with Aetna finally coming back to full speed, is likely very achievable.
We should also be looking for Catasys to announce more contracts. These would include not only new customers, but expansions of existing clients as they move into more indications and broader territories. Watching Aetna, who was an early adopter, continuing to rapidly expand, it's easy to see others follow in their footsteps.
Looking beyond the near term
For those who have asked, you know I believe CATS is a possible 10-bagger…or more. This has the potential to be an enormous company. This is possible from growth of its OnTrak program, which could eventually reach hundreds of thousands of patients. I believe there's a clear path to $200 million in revenue over the next few years. However, there's much more opportunity here.
Catasys has developed a very unique position for itself. It is the only company in the behavioral health services industry that has contracts in place with all (but one) of the major insurers. As CEO Peizer told me, there are hundreds of competitors that were funded by VCs and PE firms and they all underestimated the time and expense of getting a deal done with an insurance company.
What does this mean? Quite simply, Catasys has a number of competitors with interesting products and services that are all failing to gain traction, which means it has a very ripe acquisition or partnership landscape unfolding in front of them.
I would expect Catasys to expand its product offering over time, both through internal development and external acquisitions. As Peizer told me, anything it does along these lines will accelerate its growth. And, with the CEO being by far the largest shareholder, one can always assume any potential dilution from a deal will be strongly considered. It's safe to say that his interests are firmly aligned with investors.
Any new products would likely broaden the scope of engagement that Catasys has with insurers. At this time the company is solidly focused on behavioral health disorders; I expect to see it make a move into the larger market of chronic disease, such as diabetes, obesity, etc.
Catasys is well suited to taking on these additional markets as, according to Peizer, its "I.P. is engagement." Which makes perfect sense. We are on the forefront of digital health, but how does one interpret the data and then engage with the patients? Catasys is building a nationwide network of service providers. Going forward it is easy to see additional products layered into its current network.
The ability to add additional services is another aspect that is attractive to insurers. Insurance companies would like to have a single vendor be their digital healthcare provider. Having seen how difficult it is to enter relationships with insurers, it makes sense that they would limit the number of companies with whom they share data, engage for services, etc.
Catasys has its foot in the door with seven of the eight largest insurance companies. Expansion of services will come next. And, this is what has the potential to drive Catasys to a multi-billion dollar valuation.
CEO Peizer is not a figure without his share of controversy. However, one thing that is undisputed about him is that he's brilliant. He has spent the last 15 years building Catasys into what it is now. More recently, he has been focused on broadening and deepening the management team and infrastructure. He has developed a platform that is unique, has a huge moat around it, and is positioned to be a powerhouse in the healthcare services industry. This is why I'm not selling any stock and, instead, willing to ride the volatility to what I expect to be a huge outcome.
Daniel Carlson is the founder and managing member of Tailwinds Research Group and its parent company DFC Advisory Services, which is a licensed registered investment advisor (CRD # 297209). Tailwinds is a microcap focused research company that provides research on and consults to over 20 emerging growth companies in the technology and life sciences arenas. DFC Advisory Services is an RIA that manages money dedicated to investing in the companies covered by Tailwinds. For more information on these two companies and their track record, please see www.tailwindsresearch.com. Prior to founding these two entities, Dan spent many years working with small public companies, having been CFO of two public companies and helping finance many others. A 1989 graduate from Tufts University with a degree in Economics, Dan’s formative years in business were spent as an equity trader, first on the Pacific Coast Stock Exchange then on the buyside at several multi-billion dollar firms.
This article was submitted by Tailwinds Research. For more information on Tailwinds Research or on Catasys, please visit www.tailwindsresearch.com.
Tailwinds owns stock in the company. For a complete list of disclosures, please click here.
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