A little more than a year ago, we covered The Joint Corp. (JYNT), a small-cap specialized franchisor of chiropractic clinics in the United States. The company initially grabbed our attention because of its snowballing expansion over the past few years, causing shares to jump from $2 to $20 during a relatively short period of time.
Source: Google Finance
We are particularly interested in franchises with the potential to scale, as many successful brands have utilized this type of business model to grow rapidly, with limited capital intensity. We have previously discussed such cases in our recent Domino’s Pizza and Dunkin’ Brands articles.
In this article, we will:
- Discuss The Joint Corp.’s business model and financials.
- Assess the stock’s valuation and investor returns.
- Conclude why The Joint Corp. could provide a profitable investment opportunity, though risks remain.
Business model and financials
Over the past few years, The Joint Corp. has revolutionized access to chiropractic services since it launched its retail healthcare business model in 2010. The company strives to make quality care convenient and affordable while ending the need for insurance for millions of patients seeking pain relief and long-term wellness.
From the get-go, we are particularly excited about investing in the wellness space. Wellness, in general, has been gaining increasingly more attention, with practices like meditation and yoga undergoing a propelling trend. The company is capitalizing on this trend by offering chiropractic services at an affordable price. An appointment which normally costs around $77 is offered at $29 – a significantly lower price. While the sessions are provided on the cheap, each location’s operations are able to maintain profitability through increased volume. Management estimates that average patient visits per clinic are around 600/month in general clinics, vs. 1,350+/month in its own branded clinics. COVID-19’s staying-at-home way of life should further boost the need for self-care practices, in our view, as well.
Additionally, the company employs a franchised business model. In other words, the company only owns a few of its clinics and licenses the rights to operate under its brand name to other franchisors, while it collects royalties.
As a result of increasing consumer demand, the company’s locations have been expanding rapidly, with nearly 90% of its clinics being franchised. Source: Investor Presentation
As a result of the franchised business model, the company has skyrocketed its presence without having to allocate a significant amount of capital. With each new location, the franchisee allocates around $180K as initial build-out cost, and as a result, The Joint Corp. does not bear the risk of having to recoup the money on such a substantial investment.
In exchange for setting up a franchisee to enjoy a proven and profitable business model, the company takes a 7% royalty on gross sales, which is quite high for the sector. Further, the franchisee pays $39.9K per license, prior to year 1 sales. Additionally, the company has unlocked another stream of recurring cash flows by charging the franchisee $599/month in software fees.
As you may have imagined already, the company enjoys extremely high margins. Its royalties and license-based sales are almost 100% expense-free. During the quarter, the company incurred around $1.2M in its cost of revenues, primarily to run its own, company-operated stores. Additionally, software fees are also enjoying juicy margins, with around $92K as cost of revenues, against $631K in sales.
Source: Q2 results
As a result of its frictionless, expense-light business model, the company remained profitable during the past couple of quarters, despite the challenges caused by COVID-19.
Valuation and potential investor returns
The Joint Corp.’s valuation is quite tricky. The company is in a growth stage, with multiple opportunities for economies of scale to kick in (e.g., reducing its administrative costs/store).
Its current P/E ratio of around 94 is quite meaningless at this point and has little significance as an indicator.
Instead, let’s try to estimate the company’s future profitability in order to better value its current stock price and expected investor returns.
The company is targeting to have around 1000 clinics open by 2023. In other words, the company aims to double its locations within the next three years.
Based on its latest result, the company currently enjoys around 20.8K of operating profits per store per quarter. While the gross profits from company-operated vs. licensed stores may be different, this is quite an accurate metric since we have included the expenses needed to run its own stores.
At around 1000 clinics, we estimate around $83M of annual gross profits (or a nearly 90% gross profit margin). Also, we assume constant same-store sales for convenience purposes. Now the only expense left to take into account is its administrative and advertising ones. This is where the company can utilize its economies of scale by growing these expenses at a slower rate than its store count. While it is impossible to estimate an accurate number, we will instead assume net profit margins of around 15%, which we believe is quite reasonable, especially with such high gross margins. This equals around $14M in annual net profits in 2023. We also assume no share issuances forward, since the company’s profitability should self-fund future ventures.
While this figure is quite speculative and subject to various variables, it provides a very rough estimate of the company’s potential profits, based on its location-growth vision. At the company’s current market cap of around $250M, it means that The Joint Corp. is trading at around 17 times its potential 2023 profits, which now justifies its otherwise “high” current P/E ratio shown earlier.
To think it in reverse, if shares were to trade at a reasonable P/E of around 35 in 2023, based on its potential FY2023 earnings, investors would essentially “double” their money over the next three years. Again, this is based on our rough estimates, but the concept remains the same.
Conclusion and risks
The Joint Corp. provides a compelling investment case, presenting to investors the opportunity to get exposure in the positive trend of wellness and self-care. The franchised model employed is a high margin business, with various sources of turnover generation.
Our rough estimates are able to justify the stock’s current valuation, which currently makes little sense to assess through its P/E ratio. With clinics set to double over the next three years, we can see investors’ funds behaving similarly as well. At the same time, some risks remain.
The company’s plan to double its locations within three years may be too optimistic, based on its current net openings rate. As much as the company strives to grow, the underlying franchisee demand to buy a license is also vital. Further, despite that its business model is proven, and franchisees have been opening more and more locations, the company remains relatively small. Investors are not allocating their funds in a well-established and mature business. Profitability remains razor-thin as of now. Finally, the company has no moat, as the sector offers an easy entry to competitors.
Overall, while the company’s investment case may be in an early stage for some investors, future returns have the potential to be explosive, though they remain speculative.
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Disclosure: I am/we are long JYNT. 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.
Additional disclosure: TipRanks: BUY $JYNT