Should You Like Wednesday’s Top Stock Pick of the Day?

Every once in a while, an idea comes across my screen worthy of closer examination. Barchart.com’s top stock pick for Wednesday is just that. 

The stock recommended is The Joint Corp. (JYNT), an Arizona-based company that’s the country's largest operator and franchisor of chiropractic clinics. I’m someone who frequents a chiropractor, so I was immediately interested in the business. 

I’ve covered millions of stocks over the years. Just because the trading signal screams buy doesn’t mean the fundamentals will play along. However, from what I can see, Barchart.com’s stock pick seems promising, especially if you’re an aggressive investor.

Here’s why.

The Joint Is Jumping 

As Barchart.com points out, the entry price of $16.90 is a new buy signal based on crossing above the 50-day moving average. Historically, when it does that, the average gain holding for 31 days is 346%. That’s something.

Of course, I’m no technical analyst. I generally stick to fundamentals. The Joint appears to have plenty. 

So, as I said, it operates and franchises 838 chiropractic clinics in 40 states. That’s more than 5x more than its nearest competitor. It believes it has the potential for nearly 2,000 clinics across the U.S., Canada, and 43 other countries. That’s potentially expressive expansion. 

As for numbers, The Joint had 845,000 new patients out of 1.6 million unique patients in 2022. Approximately 34% of the new patients were new to chiropractic medicine. In addition, 84% of its gross sales in 2022 were from monthly memberships. 

That’s excellent recurring revenue. 

In the past five years, The Joint opened 394 chiropractic clinics, doubling the number of locations. Each of its clinics tends to generate 2.3x as many sales as the independent solo practitioner.

So, its business model has plenty of room for growth in terms of locations and revenue. That’s potentially a winning formula.

The Franchise Angle Is a Good One

Franchising remains one of the best ways for average Americans to grow their wealth. Approximately 10.5% of all U.S. businesses are franchises. I’m sure most adults know at least one person who owns a franchise, is a franchisor, or knows someone else whose work is franchise-related. 

The beauty of franchising (with the right franchisor) is that you don’t have to come up with all the answers. Their system does it for you. So if you’re good with people, franchising can be the solution. 

And finally, many franchises are asset-light business models, where some of the costs are transferred to the franchisee, resulting in royalty revenue in place of a location’s sales. Again, it’s a volume thing. 

In the case of The Joint, 85% of its locations are franchised. Like most large franchisors, it’s routinely granting new franchises, acquiring existing franchises, refranchising company-owned locations, and operating its locations.

Covid generated increased interest in its franchises. As a result, 2022 saw a deceleration of new franchises awarded, from 156 in 2021 to 75 this past year. However, that’s still the third-highest annual amount in its history. 

As for the franchisee investment, it’s approximately $300,000, with two-thirds for the build-out of the location. System-wide, the average revenue per location varies from $515,000 to $626,000, with a breakeven of $30-33,000 in gross monthly sales. 

The Stock Is Cheaper Than It's Been

The Joint went public in November 2014 at $6.50 a share. If you invested $10,000 in its IPO, you’d have nearly $27,000. And that’s despite its stock falling from its September 2021 all-time high near $110. JYNT has gone sideways since last June, although it has recovered some in 2023, up 27% YTD. 

It trades at 2.5x sales, well below its five-year average of 7.1x. Moreover, its enterprise value of $262.6 million is 25.9x EBITDA. That’s also considerably less than the five-year average of 64.5x.

So, the big question for investors is whether it’s a value play or a value trap.

What’s the Catch?

There’s always a catch.

The big one for The Joint is that it has more than 800 locations open, which still isn’t very profitable. In 2022, it made $1.2 million from $101.9 million in revenue. That’s a net margin of 1.2%, down from 8.2% in 2021.

If you go down the income statement line-by-line, you should be able to identify the problem. Its general and administrative expenses increased by 37% in 2022, primarily due to the increased costs associated with hiring and keeping employees on the payroll. 

With an aging population, that issue will never go away. It happens to be more acute today. If The Joint can continue to scale, operational efficiencies could return the net margin to a more palatable percentage of revenue. 

Finally, at the end of 2022, it sold 1,193 franchise licenses over its 20-year history. It finished the year with 235 in development. If you subtract 838 current locations, that leaves 120 franchises terminated in the 20 years it’s been franchising. That’s approximately six per year. Given it has so many clinics, it’s not a big deal.

As I said, the only fly in the ointment with investing in The Joint is its bottom-line profitability. There’s also a secondary concern that it can’t find enough chiropractors in the future to keep growing to 2,000 clinics. 

On the bright side, I've seen much worse when it comes to publicly traded franchises.

 

 

 

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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.