CorVel Corp. And Its Real Value (NASDAQ:CRVL)

CorVel Corp. (CRVL), a company that provides worker compensation case management for businesses, is focusing on technology and telehealth in the wake of the coronavirus outbreak. President and CEO Michael Combs stated that with “our advances in automation and telehealth, and our integration of these services with clinical management, we have the ability to provide complete virtual triage and care to our clients.” CorVel proactively set up a hotline for employers and employees experiencing symptoms, and those requiring testing are referred to a CorVel network provider that manages the process. This leading-edge technology is helping to keep injured workers safe.

The company recently announced that it would temporarily suspend its share repurchase program until further notice in the wake of the global pandemic. It also terminated its prearranged stock trading plan to repurchase common shares. This allows CorVel to focus solely on serving its customers, and the company appears to be committed to helping injured workers, employers, and employees through these challenging times.

While current news stories, good or bad, can sway our opinion about investing in a company, it’s good to analyze the fundamentals of the company and to see where it has been in the past and in which direction it’s heading.

This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company vs. the price and help you to determine if CRVL is currently trading at a bargain price. I provide various situations which help estimate the company’s future returns. In closing I will tell you my personal opinion about whether I’m interested in taking a position in this company and why.

Snapshot of the Company

A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. It shows a score of around 78/100. Therefore, CorVel is considered to be a good company to invest in, since 70 is the lowest good company score. CRVL has high scores for ROE, earnings per share, “Ability to Recover from a Market Crash or Downturn,” and ROIC. It has mediocre scores for gross margin percent, and 10-year price per share. It has a low score for PEG Ratio. A low PEG Ratio score indicates that the company may not be experiencing high growth consistently over the past five years. In summary, these findings show us that CRVL seems to have above average fundamentals since the majority of categories produce good scores.

Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.

(Source: BTMA Stock Analyzer )

Fundamentals

Let’s examine the price per share history first. In the chart below, we can see that price per share had actually been declining until 2015, then has consistently grown each year since then. Overall, share price average has grown by about 69.3% over the past 10 years or a compound annual growth rate of 6.03%. This return is nothing spectacular.

(Source: BTMA Stock Analyzer – Price Per Share History)

Earnings

Looking closer at earnings history, we see that earnings have grown fairly consistently over the past 10 years. The earnings have been growing gradually for the most part with the exception of 2015 when EPS fell.

Consistent earnings make it easier to accurately estimate the future growth and value of the company. So, in this regard, CRVL is a good candidate of a stock to accurately estimate future growth or current value.

(Source: BTMA Stock Analyzer – EPS History)

Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.

Return on Equity

The return on equity has increased overall during the past five years and has maintained a respectable level. Five-year average ROE is good at around 23%. For return on equity (ROE), I look for a five-year average of 16% or more. So CRVL exceeds my requirements.

(Source: BTMA Stock Analyzer – ROE History)

Let’s compare the ROE of this company to its industry. The average ROE of 165 Business and Consumer Services companies is 10.24%.

Therefore, CorVel’s five-year average of 23.0% and current ROE of 25.5% are well above average.

Return on Invested Capital

The return on invested capital pretty much mimics the ROE. It has increased overall during the past five years and has maintained a respectable level. Five-year average ROIC is good at around 23%. For return on invested capital, I also look for a five-year average of 16% or more. So CRVL passes this test as well.

(Source: BTMA Stock Analyzer – Return on Invested Capital History)

Gross Margin Percent

The gross margin percent (GMP) has been lower than I’d like over the past five years. Five-year GMP is subpar at around 20%. I typically look for companies with gross margin percent consistently above 30%. So CRVL has not proven that it has the ability to maintain acceptable margins over a long period.

(Source: BTMA Stock Analyzer – Gross Margin Percent History)

Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than 1. This is a good indicator, telling us that the company owns more than it owes.

CRVL’s current ratio of 1.55 is also good, indicating that it has a good ability to use its assets to pay its short-term debt. Ideally, we’d want to see a current ratio of more than 1, so CRVL exceeds this amount.

According to the balance sheet, the company seems to be in good financial health.

The price-earnings ratio of 20.7 indicates that CRVL might be selling at a high price when comparing CRVL’s PE Ratio to a long-term market average PE Ratio of 15. The 10-year and five-year average PE Ratio of CRVL has typically been between 26.6 and 28.5, so this indicates that CRVL could be currently trading at a low price when comparing to CRVL’s average historical PE Ratio range.

CRVL does not regularly pay a dividend.

(Source: BTMA Stock Analyzer – Misc. Fundamentals)

This analysis wouldn’t be complete without considering the value of the company vs. share price.

Value Vs. Price

For valuation purposes, I will be using a diluted EPS of 2.46. I’ve used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, book value, and total equity.

In the table below, you can see the different scenarios, and in the chart you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is toward the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.

(Source: BTMA Wealth Builders Club )

According to this valuation analysis, CRVL is undervalued.

  • If CRVL continues with a growth average similar to its past 10 years earnings growth, then the stock is undervalued at this time.
  • If CRVL continues with a growth average similar to its past 5 years earnings growth, then the stock is undervalued at this time.
  • If CRVL continues with a growth average similar to its past 10 years book value growth, then the stock is undervalued at this time.
  • If CRVL continues with a growth average similar to its past 5 years book value growth, then the stock is undervalued at this time.
  • If CRVL continues with a growth average similar to its past 5 years total equity growth, then the stock is undervalued at this time.
  • According to CRVL’s typical PE ratio relation to the S&P 500’s PE Ratio, CRVL is undervalued.
  • If CRVL continues with a growth average as forecasted by analysts, then the stock is overpriced.

This analysis shows an average valuation of around $62 per share versus its current price of about $50, this would indicate that CorVel Corp. is undervalued. However, because of the lack of analyst coverage and the uncertainty of the US market and economy now, I would err on the more conservative forecasted growth valuation range of $40 – 47.

Forward-Looking Conclusion

According to the facts, CorVel Corp. is financially healthy in a long-term sense in having enough equity as compared with debt, and in the short term because the current ratio indicates that it has enough cash to cover current liabilities.

Other fundamentals are solid, including ROE, ROIC, and EPS.

Lastly, this analysis shows that the stock is undervalued.

A big concern of mine with this stock is revealed in its performance vs. the benchmark S&P 500. From 2007 to 2020, in the chart below, we can see that the S&P 500 (VFIAX) outperforms CRVL the majority of time during recessions and booming times. The S&P 500 is a more stable and consistent investment, whereas CRVL is more volatile.

There could be a change to make a nice gain by buying CRVL at a heavily-reduced price and to sell when it has one of its price spikes, but timing this would be difficult. On the other hand, the majority of the time, it seems that it would be a safer, more diversified, and more consistent investment choice just to invest in the S&P 500.

Predicted Growth

CorVel is an extremely difficult stock to forecast future growth since there’s virtually zero analyst coverage of this stock. When searching for growth forecasts, forward PE ratios, etc., you’ll likely come up empty handed.

Therefore, it might be best to look into the past to determine what time of growth we could expect in typical years for this company.

During the past 10- and five-year periods, the average EPS growth rate was about 9.1% and 12.4%, respectively.

When considering cash flow growth over the past 10 and five years, the growth has been 5% and 15.9%, respectively.

If considering actual past results of CorVel, the story is a bit different. Here are the actual 10- and five-year return results.

______________

10 Year Return Results if Invested in CRVL:

Initial Investment Date: 4/5/2010

End Date: 4/5/2020

Cost per Share: $18.48

End Date Price: $49.94

Total Return: 170.24%

Compound Annualized Growth Rate: 10%

_______________

5 Year Return Results if Invested in CRVL:

Initial Investment Date: 4/5/2015

End Date: 4/5/2020

Cost per Share: $35.7

End Date Price: $49.94

Total Return: 39.89%

Compound Annualized Growth Rate: 7%

_________________

From these scenarios, we have produced results from 7% to 10%. I realize that the past isn’t an ideal way to estimate future results, but since there’s so much uncertainty surrounding this stock because of coronavirus and the economy, the past may be our best way to gauge what the potential future growth of the company could look like.

As Warren Buffett says “In the business world, the rearview mirror is always clearer than the windshield.”

In a nutshell, CorVel seems like a company that provides a needed service (workerscompensation management) that will continue to be needed for the long-term future. I believe that CorVel will survive through the coronavirus and resulting recession. It seems to be a solid company with strong fundamentals, but I couldn’t say that it’s a wonderful business.

There are real threats and weaknesses in the business where more dominant competitors could cut into CorVel’s market share. In addition, changes resulting from coronavirus involving healthcare laws, workers comp, and business legislation could greatly affect this company and its share price.

If my belief that CorVel will survive this current crisis and if an investor was able to buy the stock when it was selling at a discount price (possibly around $40 or less), then you might reasonably expect a long-term annual return of approximately 9%-10%. This is in-line with past performance.

But in my opinion, why would I take a chance with investing in this one relatively volatile company when I could simply invest in a low-fee S&P 500 index fund, which can offer similar long-term returns or better, with less risk, more diversification, dividends, and more consistent performance?

Initially, CorVel looked to be a promising under-the-radar value play, which could’ve been a big winner once the economy and market recovers. However, after digging deeper into the company, I’ve realized that CorVel’s risk-to-benefit ratio isn’t as favorable as I had originally thought.

If you want to find good companies at bargain prices that will provide you with long-term returns and dividends in any environment, then my Seeking Alpha Marketplace service (Good Stocks@Bargain Prices) is a good match for you.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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