American Shared Hospital Services (AMS)

25 03 2010

Despite the fact that the DOW is up over 60% from its lows last year, there are still stocks that are a bargain. Of course, one has to start digging in the micro-caps to uncover one. Two nights ago, I came across American Shared Hospital Services (AMS). In general, I stay far away from medical companies. I usually don’t understand the treatment or materials they provide, or I don’t know what sort of new treatments could render the business obsolete. Also, many health/pharmaceutical stocks aren’t even earning any cash and investors are just gambling on whether or not the FDA will approve the company’s product. Fortunately, none of this junk applies to AMS.

The Business: The profile on Yahoo! Finance says the following:

“American Shared Hospital Services, together with its subsidiaries, provides Gamma Knife stereotactic radiosurgery equipment and radiation therapy and related equipment. It offers Gamma Knife stereotactic radiosurgery is a non-invasive procedure, which is an alternative to conventional brain surgery. The company also provides image guided radiation therapy services and related equipment. In addition, it offers planning, installation, reimbursement, and marketing support services. The company serves 19 medical centers in 17 states. American Shared Hospital Services was founded in 1980 and is based in San Francisco, California.”

Gamma Knife stereotactic radiosurgery sounds a lot more complicated than it is (conceptually, that is!). Basically, the Gamma Knife machine treats brain tumors by shooting a beam of gamma radiation at a specific point in the patients brain. The Gamma Knife treatment is cheaper and produces less complications than open brain surgery.

According to AMS’s 2008 10-K (the 2009 10-k should be released soon), AMS had 20 existing contracts. Two expired in 2008, three expired in 2009, one will expire in 2010, four in 2011, and two in 2012. The rest expire in 2013+. So, it looks like AMS has lost five contracts. According to a press release, one of the hospitals whose contract expired in 2008 has renewed its contract and AMS has entered into a new contract to supply a Gamma Knife system in Lima, Peru. By my estimating, AMS is down 3 contracts.

At this point, I’m far too busy to finish this write up, so I’m going to copy and paste what I posted on the Yahoo! Finance message board.

Post one:

“Looking at AMS’s cash flows over the past five years (… its operating cash flows have fluctuated between 7 and 9 million. Costs of maintenance and supplies for AMS have historically been about 6% of revenues or a little over a million dollars. Assuming maintenance cap ex is really 3 million dollars (I believe it is less), you get owner earnings over the previous five years of anywhere from 4 to 6 million dollars (for the definition of owner earnings, see Buffett’s 1986 letter to shareholders). I believe that this may drop in the immediate future, but these will be the correct numbers long term.

Using a discounted cash flow analysis, and assuming that this company only produces 2 million dollars in owner earnings for its remaining life (at 0% growth rate), we’re looking at a 20 million dollar company [I should have stated that I’m using a 9% discount rate]. At the current market cap of 12 million, it’s at a 40%ish discount.

Let’s throw in Still Rivers on top of that just for fun. This is a no-brainer guys.

What say you?

p.s. I’m talking long term, not what the stock’s going to do over the next 6 months but rather over the next five years.”

Response from Mattr119:

“I agree with you completely. The fact that the stock has remained so low for so long makes me wonder if I am missing something and it’s not really as good as it seems, but I think the reality is that it’s just too small of a company to notice.

It’s been mostly small investors (like me) buying or selling a couple thousand shares here and there. At some point we are going to need some larger investors to take notice and build positions which is when you will see the company’s true value realized.

As you calculated based on their cash flows over the past 5 years, the company is worth about $20 million, and that doesn’t include any future growth potential. And there is a lot of growth potential for this company…
– 32 million more Americans will have health insurance as a result of the new health care reform bill.
– Renewed interest in gamma knife procedures based on recent medical studies.
– Expansion into international markets for gamma knife equipment.
– 2 Varian multi-room PBRT facility deals (applying for FDA approval soon).
– 3(?) single-room Still River PBRT deals (applying for FDA approval in Q1 2011).

Add all of that to the $20 million valuation and see where you end up!”

My Response:


You make more good points. However, a $20 million market cap would make this stock $4.50. Looking at the 5 year chart, this stock was trading in the 6 dollar range only three years ago. I disagree that large investors will need to take notice (which probably won’t happen considering it has a tiny tiny market cap) for the company’s value to be realized. Price still follows intrinsic value, whether there are large investors or not. I think that a catalyst will force a proper valuation sooner, but it isn’t necessary. One such catalyst may be the the Still River FDA approval.

Rather than focus entirely on the upside of this stock, we should also recognize the risks of owning it. There is a possibility that Still River doesn’t gain approval, and that AMS continues to lose contracts. I think the probability of this occurring is pretty small, especially after the health care reform (with which I can’t disagree more) is taken into consideration.

There is also the risk of inflation. Companies who eventually require large capital expenditures or have large amounts of tangible assets that will eventually need to be replaced (Gamma Knife machines) are hit harder by inflation than companies who have large amounts of economic (not accounting) good will. In the end, there isn’t a whole hell of a lot you can do against inflation other than commit a portion of your portfolio to an inflation hedge like gold.

Either way, I believe that these risks are pretty small. I’ll do bigger write up on AMS and post it on my blog when I get some time this weekend.


Follow or add to the discussion here:

Disclaimer: I am not a licensed investment adviser. I’m not a CPA, CFA, or anything of the sort. In fact, I’m not even a licensed fisherman. The previous post is NOT investment advice.

Edit: Disclosure: I placed a quarter of the Reason in Life portfolio into AMS, buying 840 shares at $2.66.




2 responses

14 04 2010

Just found your blog…good analysis thus far. Question for you — as a fellow investor with “value” leanings, what do you make of the market opportunity right now? I feel that most securities are fairly priced and I don’t really see anything that is a screaming buy. I’m sitting mostly on cash at this point but it’s frustrating to be left out of the rally.

Also, you should check out this guy’s blog – another value investor with very transparent, analytical reasoning.

14 04 2010

Hey Dan,

Thanks for the compliments. I feel the same way that you do. It’s pretty tough to find a deal right now. The market has rallied so much, and it seems like the damn thing is just going up every day. I’ve recently been looking in the micro caps trying to find an opportunity and I think I’ve found one. CHCG.OB looks very cheap and I’ll be doing a post on it pretty soon.

I’ll check out that blog. Looks interesting. Do you have one?


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