Surgery Partners Stock: With Bain Capital Deeply Involved, Prospects Look Good
Surgery Partners Set for Rally or Taking Private
We all know about the past battle in Congress regarding the desire of the Republicans to repeal and replace “Obamacare.” Albeit, so far, nothing major has occurred on that front.
Despite the uncertainties in the U.S. healthcare sector, we can probably all agree that the aging population implies opportunities, and that can help medical services companies like Surgery Partners Inc (NASDAQ:SGRY).
The company’s stock is trading down 34% over the past year, but it has been showing some signs of rallying, rebounding 16.5% this year.
Surgery Partners is an operator of surgical and associated ancillary care through a network of 124 surgical facilities and 60 physician offices in 29 states.
The market concern about SGRY stock is the company’s highly leveraged balance sheet, resulting from its acquisitions of medical facilities.
The high debt could be problematic, but Surgery Partners has been growing its revenues and moving toward being a consistent producer of profits. The company has also been generating positive earnings before interest, tax, depreciation, and amortization (EBITDA) and free cash flow (FCF).
An intriguing fact is that Surgery Partners is 54.4% owned by the major private equity investor Bain Capital, L.P.
I view Bain Capital’s involvement as critical, since the company can help drive better results and perhaps take Surgery Partners private in order to improve the company.
A glance at the SGRY stock chart reflects the technical breakdown from the June 2017 highs to the $7.10 bottom.
Surgery Partners stock has subsequently retraced back to take out resistance at $12.00 and $13.00.
Chart courtesy of StockCharts.com
If Surgery Partners can strengthen its fundamentals, I would expect another leg up in its stock price back to the $20.00 level achieved in mid-2017.
My Fundamental Bull Case for SGRY Stock
Surgery Partners’ growth in revenues has been strong, on the back of the company’s aggressive expansion.
Revenues have grown in four straight years from $284.6 million in 2013 to $1.3 billion in 2017, translating to an impressive compound annual growth rate (CAGR) of 47.3%.
|
Year |
Revenue | Growth |
|
2013 |
$284.6 Million |
|
|
2014 |
$403.3 Million | 41.7% |
| 2015 | $959.9 Million |
138.0% |
|
2016 |
$1.2 Billion | 19.8% |
| 2017 | $1.3 Billion |
16.5% |
(Source: “Surgery Partners Inc,” MarketWatch, last accessed July 19, 2018.)
Surgery Partners is estimated to continue its revenue growth at 31.3% in 2018 (to $1.8 billion), followed by 7.4% in 2019 (to $1.9 billion). (Source: “Surgery Partners, Inc. (SGRY),” Yahoo! Finance, last accessed July 19, 2018)
The decline in the growth rate is likely due to Surgery Partners reducing its acquisitions and aiming to drive up its profitability.
The key EBITDA is positive, and it increased from 2014 to 2016, prior to having a small decline in 2017.
|
Year |
EBITDA | Growth |
|
2013 |
$82.5 Million |
|
|
2014 |
$108.2 Million | 31.0% |
| 2015 | $211.0 Million |
95.1% |
|
2016 |
$244.9 Million | 16.1% |
| 2017 | $229.7 Million |
-6.2% |
(Source: MarketWatch, op cit.)
Generally accepted accounting principles (GAAP) earnings have been mixed, with losses in three of the past four years, including a major move to the loss column in 2017.
|
Year |
GAAP Diluted EPS |
| 2013 |
-$0.19 |
|
2014 |
-$1.37 |
| 2015 |
$0.04 |
|
2016 |
$0.20 |
| 2017 |
$1.62 |
(Source: MarketWatch, op cit.)
The positive news is that the outlook looks encouraging, with Surgery Partners estimated to report an adjusted $0.04 per diluted share in 2018, with a high estimate of $0.55 per diluted share.
For 2019, Surgery Partners is expected to earn $0.55 per diluted share, but there is a high estimate of $1.10 per diluted share.
As I mentioned, the high debt load is a negative factor, but Surgery Partners has been able to drive positive levered FCF in five straight years.
|
Year |
Free Cash Flow |
|
2013 |
$45.0 Million |
|
2014 |
$14.2 Million |
|
2015 |
$51.0 Million |
|
2016 |
$86.1 Million |
|
2017 |
$91.3 Million |
(Source: MarketWatch, op cit.)
Analyst Take
Bain’s major equity position in Surgery Partners gives me confidence that Surgery Partners will not be allowed to fail.
Furthermore, SGRY stock has been attracting insider buying. Over the past six months, insiders bought 89,927 shares, which is a bullish signal.
Surgery Partners stock could take off if the company can deliver consistent growth.
