The Joint Corp. can relieve you from pain due to high inflation

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Phynart Studio/E+ via Getty Images

1. Introduction

Modern people suffer from chronic muscle pain due to the habit of sitting for a long time at home or at work. They use a variety of methods, including drug treatments and manual therapy, to relieve pain and stay healthy.

The common company (NASDAQ: JYNT) provides the solution for chiropractic care. Licensed practitioners make adjustments and provide an excellent alternative to pain relief measures for patients concerned about the side effects of drug treatment.

Additionally, the company creates great value for consumers, business partners, and the company itself by ameliorating inefficiencies and inconveniences that have long existed in the chiropractic industry through its unique and innovative business models.

2. Investment Thesis

First, the company is in a large and growing industry, and its current market share is still low, which leaves room for future growth.

Second, it has several characteristics of a quality business, including first-mover advantages, an ability to sustain high returns on invested capital, and conservative balance sheets.

Finally, the current share price has significant upside potential given the growth potential and quality of the business.

2-1) Growth

The chiropractic industry is large and growing. Chiropractic care helps people with a variety of pains, including back pain. According a company file which references the bureau of labor statistics and the global chiropractor market study IBIS, people in the United States spend about $90 billion on back pain and about $18 billion on chiropractic services.

JYNT Chiropractic Market Share in Industry

The company’s market share (The Q2 22 Joint Investor Presentation)

Nevertheless, the company’s share represents only a fraction of the overall market. In other words, the company has enough leeway to continue growing in this market in the future. As the image above shows, the market is very fragmented. 96% of the market is made up of independent practitioners, and only 4% represents multi-unit operators like JYNT. Comparing multi-unit operators, the company has a market share of half, indicating that it has competitive advantages.

2-2) Competitive advantages

The company is innovative in the way it does business in a highly inefficient industry. It differentiates itself from its competitors by using a private, uninsured, and cash-based payment model.

How is articulation different from traditional chiropractic?

Innovative value proposition (The Q2 22 Joint Investor Presentation)

The Company offers convenient, walk-in chiropractic care at retail outlets to its customers or patients. In addition, it offers great values ​​to its employees and business partners such as chiropractic practitioners, including higher salaries and no hassle with administration, which ultimately gives them more time to improve their skills. basic.

The Joint widens the gap between competitors

Company Peer Group (The Q2 22 Joint Investor Presentation)

The company also increases its value based on its competitive advantages. First, it maximizes first-mover advantages. As seen above, the company holds the largest share among multi-unit operators and is widening the gap. Although the Airrosti, HealthSource Chiropractic and ChiroOne wellness centers are of comparable scale, they have been in decline in contrast to the company’s growing number of clinics since 2017. Additionally, they rely primarily on insurance-based models . Competitors who adopt the same cash-only model as JYNT are 11 companies but cannot match the company scale. Eight of them operate less than 12 clinics.

Second, the company directly operates the clinic or recruits franchisees. The franchise gives it a great competitive advantage. It reduces capital expenditure because franchisees finance part of the investment. It also generates high returns for the company by receiving fees such as royalties based on sales.

Chiropractic Economy

Clinical economics (The Q2 22 Joint Investor Presentation)

It is good for franchisees to participate in the Joint franchise. Its clinics have high unit profitability because the initial investment is low. All they need is a decent sized retail space and a minimum of two people to run a clinic, including WC (wellness coordinator) and DC (chiropractor). There is no inventory risk like with other retailers. Therefore, the period to break even is quite short and takes about eight months.

The total number of franchised clinics owned by the company

Activity area (The Q2 22 Joint Investor Presentation)

The Company’s current portfolio consists of 85% franchise clinics and 15% corporate clinics. He must quickly increase the number of clinics to gain wide brand awareness across the country. However, the proportion of the franchise will increase later when it enters a certain stage of maturity. I expect it to take three years, or so it operates over 1,000 clinics. Then, the profitable business segments will contribute more to the overall profitability of the company, which will significantly increase the value of the company.

Joint credit ratios

Credit Metrics (Created by the author from company reports)

Finally, the company maintains a conservative and solid balance sheet. It can withstand the current economic uncertainty and adverse macroeconomic factors, including rising interest rates, high energy prices and heightened geopolitical risks. The company has a cash balance greater than the total amount of debt, thereby protecting itself from refinancing risks and using the cash for lucrative reinvestment opportunities. Moreover, its services are inherently tech-proof unlike other retail companies.

3. Valuation

The company’s primary value driver is the franchise clinic segment. Franchised clinics generate strong and stable free cash flow because they have better profitability and higher capital turnover than company-owned clinics.

My valuation assumptions are as follows: the target number of clinics opened for the next 10 years is 2,000. I assume that the proportion of franchised clinics will increase from 85% to 95%. System-wide sales per Joint store are expected to grow 3% per year, and franchise fee margin royalties are set at 12%. The tax rates are 27.0% and the cost of capital is approximately 9.0%. Using these assumptions, I estimate the company’s future free cash flow as shown below.

THE DCF JOINT MODEL

FDC (Created by the author from company reports)

My valuation model implicates the company’s terminal EV/EBITDA multiple at around 15 times. The calculated value per action is approximately $25 after taking into account a 5.0% probability of failure. This indicates that the current price is undervalued and has around 40% upside potential.

DCF results

Value per share (Created by author)

I examined the distribution of intrinsic value per share by performing sensitivity analysis of key value drivers, including target clinics open, store sales growth rates and proportion of clinics franchised. I found that not hitting the target number of stores had a significant impact on value. If the number of stores falls below 1,350 in the next 10 years, the current stock price has no upside potential.

Conversely, sales growth per store does not seem to have a greater impact than other factors.

Finally, if the ratio of franchise stores remains the same or lower, the stock price is likely to decline further. This is because the business needs to grow by building low-margin, high-cap company-owned clinics, not through profitable franchised clinics.

The result of the sensitivity analysis

Sensitivity analysis of the main value drivers (Created by author)

4. Risks

The high inflation environment had an adverse effect on the company’s profitability. Labor cost is one of the major costs necessary to run a clinic. Recently, the company increased the salaries of its clinic employees. As a result, the break-even period has been reduced from six months to eight months.

However, the company has the power to set prices to compensate for increased costs. Historically, the company has increased the price several times. Its average service price was $22 in 2015, but now $33. Price increases will be positive for the company’s profitability as it opens more clinics.

Additionally, there is room for further price increase as it offers unique value compared to traditional chiropractic care services. Just as Netflix (NFLX) has maintained its pricing power by offering differentiated value from linear television, The Joint’s service is very different from a traditional service. However, what sets it apart from Netflix is ​​that there are no strong competitors in the market yet. Netflix still offers great value over traditional TVs, but it also has to compete with strong competitors like Amazon (AMZN) and Disney (DIS).

But the company doesn’t seem to have such a strong competitor. I am therefore convinced that the ability to maintain its pricing power will remain intact for the foreseeable future and that the company’s profitability will gradually improve despite the difficult inflation environment.

5. Closing

The Joint Corp. is a value creator. The company operates in a large and growing chiropractic market. It has business qualities that can sustain a high return on invested capital. I am convinced that the combination of growth opportunities and competitive advantages will generate a return superior to the market.

However, the stock price is undervalued due to external factors and is a good entry point to take a long position in the company. A high inflation environment could delay realizing its upside potential, but The Joint Corp. has pricing power that can overcome negative effects.

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