LFST | Flow
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LFST | Best Idea Long | Flow Thursday, December 16, 2021 @12:30pm ET Healthcare Subscribers: CLICK HERE for event details (includes video, dial-in and materials link) |
Background
Lifestance is a hybrid outpatient mental health company that came public in 2020. They are one of the largest providers in a highly fragmented industry. Their goal to provide in-network psychotherapy keeping out of pocket expenses low for patients. Their growth strategy is to expand their network of ~5,000 therapists through both de novo expansion and through acquisition. The market for mental health services is severely supply constrained as patient demand growth, which was strong before the pandemic, has been even stronger after. The result has been a very difficult staffing environment across many industries, but perhaps worse in Health Care. On their 3Q21 earnings release Lifestance acknowledged the difficulty in hiring and reduced their guidance as a direct result of the tight labor market resulting in a 64% drop in the price from a peak of $29 to the current price of $9.55.
Thesis
We expect Lifestance to successfully continue their expansion and successfully continue to acquire and hire staff. The main culprits of labor shortages will significantly benefit Lifestance as we see legacy providers as net losers of staffing, which will flow into platforms and providers like Lifestance. Glassdoor ratings are high and there are advantages for providers to being in their network for billing and reimbursement purposes. Our trackers show that Lifestance has been successful in growing their staff at same store locations and that turnover has been low, reflecting our positive outlook. They have also intentionally slowed their growth rate in order to respond to the needs of their employees and the needs of the patients in their care. Its these types of actions that we believe result in continued success both staffing same store growth, and acquisitions.
Valuation
Without significantly exceeding consensus, we expect the multiple to result in a 100% upside over the coming 12 months. Following 3Q21 earnings the multiple compression has been severe, both as a result of the guide and Macro Quad 3 factors and accelerating inflation. Looking ahead to 1Q22 Hedgeye's macro outlook calls for slowing inflation and accelerating GDP, or a Macro Quad 1 outlook, a framework that will be a tailwind for LFST. We're expecting, conservatively we think, modest upside to therapist growth in 2022, but our tracker will keep us on top of location level trends. On our 2022 revenue estimate of $912M we think the stock can re-rate to 9.0-10.0X EV/Sales and trade to $19-$20 versus the current price of $9.55, or 100%+ upside from here.
Catalysts
Beyond the usual conference appearances and earnings announcements we will be watching our own proprietary tracker and monthly data from BLS an BEA.
Tracker updates monthly - we've developed a proprietary method to track providers at the individual location level. We'll examine
BEA/BLS - Both BEA and BLS reports series that reflect wage growth and labor supply and consumption across the US Medical Economy, including mental health providers on the inpatient and outpatient sectors. Currently we see the
Risks
The demand for mental health services may remain elevated for years to come. Providers we've spoken to suggest labor shortages will persist well into 2023. LFST may not be able to hire and retain staff. They've also been running studies on outcomes data, which may not show a clear benefit. As with all video based provider networks, we worry about the consequences of data privacy, and the release of video therapy sessions.
