Do you want to be a Patriot?

Investment Analysis Clubs Saul’s Investing Discussions
1

Patriot National Inc (PN) - An Evaluation

Who is Patriot National?
http://www.patnat.com/
Patriot National is an independent national provider of comprehensive technology-enabled outsourcing solutions that help insurance carriers, employers and other clients mitigate risk, comply with complex regulations and save time and money. They offer a full suite of end-to-end insurance related and specialty services that allow our clients to improve efficiencies and reduce expenses through their value-added processes. The core of their value proposition includes the benefit of a “one-stop” solution with their broad array of offered services, scalable, state-of-the-art technology and solutions to complex business and regulatory processes. Their goal is to be the preferred provider of mandatory employer services such as risk management services, health and welfare services, employee onboarding and compliance services.
Patriot National Inc is an insurance play that has seen its stock tumble after the company closed a shelf offering of stock and warrants. The CEO is the major shareholder and pledged not to sell any stock in 2016. This is a Zacks Rank #1 (Strong Buy) that is down roughly 55% over the last month. It had an IPO on Jan 16, 2015 and has a market cap of $160M yesterday.

How did you learn about them?
A stock screen search for stocks with high earnings growth and high profit margin.

Are they growing Revenue?
For a look at Revenue:

2012: 38.4M
2013: 55.9M
2014: 117.3M
2015: ~210M

Sequential YoY increases are 46%, 110%, 79%.

How about adjusted earnings?


Q1 2014: 0.06      Q1 2015: 0.18      Q1 2016: 0.25 estimated
Q2 2014: (0.06)    Q2 2015: 0.18      Q2 2016: 0.27 estimated
Q3 2014: 0.11      Q3 2015: 0.23      Q3 2016: 0.30 estimated
Q4 2014: 0.01      Q4 2015: 0.25est   Q4 2016: 0.35 estimated
2014 total: 0.12   2015 total:0.84    2016 total:1.17

Sequential TTM earnings growth increases are 0.84/0.12 = 700%. With a PE 5.9/0.84 = 7.02 this gives a 1YPEG of 7.02/700 = 0.01!

Is there a reasonable PE?
It’s 7 as of this writing compared to an Industry Average TTM PE of 21.

Tell me more what they actually do?
They principally offer two types of services: front-end services, such as brokerage, underwriting and policyholder services, and back-end services, such as claims adjudication and administration. They provide our services either on an individual basis, as bundles of two or more services tailored to a client’s specific needs or on a turnkey basis where we provide a comprehensive set of front-end and back-end services to a client. They also offer specialty services currently including technology outsourcing and other IT services, as well as employment pre-screening and background checks. They generate fee revenue for their services from their clients based on (1) a percentage of premiums for the policies they service, (2) the cost savings they achieve for their clients or (3) a fixed fee for a particular service. Unlike their insurance and reinsurance carrier clients, they do not generate underwriting income or assume underwriting risk on workers’ compensation plans.

Do they have a moat?
They are growing about 50/50 organically AND thru acquisitions. They “expect this strong momentum to last for some time” as they are just now starting to see the benefits of the cross selling of their service offerings to their 124 insurance carriers which grew 3 times larger than their 2015 goal. They bid their Patriot Technology Software Solutions and won a new State customer, Missouri Employers Mutual, who is the state’s largest writer of worker’s compensation. That was their first time they went after a State company and they plan to expand to capture other States as well now.

What is your overall impression?
They made a mistake on the pulled back offering of stock and warrants and have been very oversold as a consequence in my opinion. I think given their multiyear growth of revenue and earnings that this is a growth stock at a value stock price. They have 18 different revenue streams and have over 3200 insurance agencies that are just now beginning to add the PN services. Their operating cash flow for 3Q 2015 was $10.8M which is 292% higher than 3Q 2014. The 2016 forecasted financials ARE going to be adjusted UP further as the CEO mentioned a couple of times in the last earnings call given the higher than planned growth this year (noting that much of that has not been adjusted into the 2016 forecasts yet). % of Shares Held by All Insider and 5% Owners is 62%. It is a MicroCap sized company so it has VERY high risk, but I think worth the high reward potential.

Now what do you fools think?

15 Likes
2

F1Fun,

Thanks again for posting another idea. The stock and warrant offerings which apparently decimated the stock price in mid-December is an interesting story. There are three press releases on their IR website. While I don’t understand all of the details, here’s what I gather.

On 12/14/15 (1st press release) the company gave notice of stock and warrant offerings which closed on 12/16 (2nd PR). The stock price subsequently plummeted. On 12/23 (3rd PR) the company, in recognition of the market’s reaction, bought back all of the shares such that no dilution would occur.

The company’s reaction to the market is both interesting and potentially bullish.

Thanks again for bringing this to the board. I’m going to dig a bit deeper myself and am interested to hear other’s take.

Take care,
A.J.

1 Like
3

You’re welcome A.J. Yes, that trio of press releases does point to some kind of weakness in the management. I’m just betting that it isn’t a fatal weakness and that the market will long forget this if they continue to hit their numbers the next few quarters. They seem to be executing very well so far.
I look forward to others’ point of view and input as well.

4

F1Fun,

I see the stock IPO’ed Jan 2015, and then announced a secondary. I can see why stockholders panicked at that. It does make you really wonder what was going on? Did they misjudge their capital needs? Was the IPO just to make the insiders rich and now they need more money to grow the company? It has gone from $15 to $6 really fast and ugly.

Market cap is $159M, so very small stock and trades an avg of 40K shares a day, which is about double what it was before the screw up and sell off. This is not likely a stock that institutional funds will load up on, which could limit the upside. If you wanted $1M in your fund, it would take 5 days of volume to meet that, which would be very disruptive.

http://stockcharts.com/freecharts/gallery.html?pn

Zack’s calls it a bargin…
Patriot Nation (PN) is an insurance play that has seen its stock tumble after the company closed a shelf offering of stock and warrants. The CEO is the major shareholder and pledged not to sell any stock in 2016.(after just selling) This is a Zacks Rank #1 (Strong Buy) that is down roughly 55% over the last month.

IBD ratings are very poor, but we don’t use those directly on the board.
Composite Rating 26…Fail
EPS Rating 79…Fail
RS Rating 4 …Fail
Group RS Rating B+ …Pass
SMR Rating N/A …N/A
Acc/Dis Rating D- …Fail

Interesting, but for me this is too risky and maybe too early. Not sure if they really have a moat. Like Ellimae ($1.89B cap) they provide software for dealing with regulations and compliance in their industry, but they seem too risky and too small.

Thanks.

3 Likes
5

This is not likely a stock that institutional funds will load up on, which could limit the upside. If you wanted $1M in your fund, it would take 5 days of volume to meet that, which would be very disruptive.
Puddinhead, you raise a good point on low volume stocks.

I have a preferrence for not getting into low volume stocks because of the point you mention and due to the inherent volitility. My preference is not is not a hard rule, but might be pending on how this one goes.

This board has talked about avoiding ‘story stocks’, but what about low volume stocks. Do you avoid them? Don’t many of these high growth stocks start with low volume? Saul and others, does volume factor in on your decisions?

6

F1Fun,

One of the main concerns with this business is that the founder, Mr Mariano, who owns 59% of the shares, also owns 100% of Guarantee Insurance which is the company’s biggest customer.

This creates a major conflict of interest.

PN has been dealing with this over the last year by taking on more independent carriers, while at the same time switching some of the expiring contracts with Guarantee Insurance to other independent carriers. They state they will reach their goal of 20% revenue from related parties by March 2016.

Having listened to the 3rd Quarter conference call I believe management is sincere about this and they have already made good progress.

However, with the market jittery about related transactions, when the stock placing was announced in December - including a substantial private sale of some of Mr. Mariano’s shares - it is perhaps understandable that the market had a hissy fit and the stock price collapsed.

I think we can look beyond this. The company is growing like a weed and they have executed impeccably over the last year. Annualising the adjusted earnings for the third quarter gives a P/E of about 6 - which is crazy low for a company with this growth.

There is always risk with a company of this size. But given that this stock can double in the short term just to reach a sensible P/E with possible strong longer term growth beyond that I think the potential for reward more than justifies the risk. On that basis I have taken out a small position.

Thanks F1Fun for bringing this stock to the board.

Ian

(I have now discovered a few stocks on this board that have led to investments, so hats off to you Saul for creating such a useful and informative board)

2 Likes
7

Ian,
You’re welcome. I’ve been thinking about writing up an evaluation on this one and strangely felt compelled to share on this board in case it actually does do well. Thanks for the feedback and additional information. I did hear a question about the Guarantee Insurance company in the earnings conference call, but did not catch the conflict of interest. Could you share where you found out that the CEO of PN is a 100% owner of Guarantee Insurance? I found the following in the 10-Q, but it doesn’t say 100% owner:

references to “Guarantee Insurance” refer to Guarantee Insurance Company and references to “Guarantee Insurance Group” refer to Guarantee Insurance Group, Inc. (f/k/a Patriot National Insurance Group, Inc.), the parent company of Guarantee Insurance, entities that are both controlled by Steven M. Mariano, our founder, Chairman, President and Chief Executive Officer"

I fully agree the current P/E is ridiculously low and that the company is blasting thru it’s goals for growth. It is a microcap stock and could turn on a dime in either direction still, but I think the performance data indicates it will be in the positive direction in my opinion. We shall see. Hope we are all doing better after the next earnings announcements coming up.

By the way, Saul. I have to admit that I never read a single 10-Q before I found your board. Now I don’t understand why I was so lazy.

8

Could you share where you found out that the CEO of PN is a 100% owner of Guarantee Insurance?

From the 2014 10K

Mr. Mariano, our founder, Chairman, President and Chief Executive Officer, beneficially owns 59.5% of the outstanding shares of our common stock and substantially all of the outstanding equity of Guarantee Insurance Group

Hope this helps

Ian

1 Like