Analyst: Buy CRH Medical After An 'Overdone' Selloff

CRH Medical Corp (NYSE: CRHM)'s 27 percent plunge on Friday in reaction to rate changes by the Medicare & Medicaid Services (CMS) is overdone and investors should consider buying shares on the weakness, Cannacord Genuity's Richard Close said in a report.

The proposed changes by the CMS is certainly a negative for CRH Medical, the analyst argued, but not negative enough to warrant a 27 percent decline in the stock since the negative rate change would effectively be less than 20 percent and only apply to around 75 percent of the company's volume, which is associated with lower GI procedures.

Assuming a 15 percent rate cut on the GI segment would result in just a 19 percent reduction in the company's 2018 consolidated adjusted EBITDA to common, Close added. Even if this would be the case, CRH Medical will still boast meaningfully higher margins compared to its peers. Specifically, a 25 percent rate cut would imply an adjusted-EBITDA margin of 43 percent while rivals including Envision Healthcare Corporation (NYSE: EVHC) and MEDNAX Inc (NYSE: MD) are expected to post 2018 margins of 13 percent and 18 percent, respectively.

Meanwhile, CRH Medical isn't likely to make any changes to its M&A strategy and there aren't expected to be any notable change to its product sales segment, corporate expenses, or the cost structure for the anesthesia services segment.

Pending more clarity from management on any expected impact, Close maintains a Buy rating and $8 price target on CRH Medical's stock.

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