Reminder - Black Book Invite | LFST & ACHC

New Best Idea Long LifeStance (LFST) is a hybrid outpatient mental health company that came public in 2020.  We've been stalking this one since the 2Q21 earnings call.  LFST is one of the largest providers in a highly fragmented industry, and their goal is to provide in-network psychotherapy that keeps out of pocket expenses low for patients.  The growth strategy is to expand the network of nearly 5,000 therapists through organic hiring and both de novo expansion and acquisitions.  The market for mental health services is severely supply constrained as patient demand growth, which was strong before the pandemic, has done nothing but increase.  The result has been a very difficult staffing environment across many industries, especially Health Care.  LFST has acknowledged the difficulty in hiring and reduced guidance as a direct result of the tight labor market (see 3Q21 results), resulting in a 64% drop in the stock price from a peak of $29 to the current price of $9.55. 

We expect LFST to successfully continue its expansion, and 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. 

Best Idea Short ACHC: Since the stock reached its all-time high in April, ACHC has seen a significant re-rating in both its EV/Sales and EV/ EBITDA multiples, now trading at 2.88x NTM Sales and 12.35x NTM EBITDA.  From here, we believe the price will be more highly correlated to EBITDA based on management’s ability to succeed in an environment primed for top-line growth but shrouded in supply headwinds.

ACHC relies more heavily on the ability for a legacy provider to successfully adapt to the new needs of patients and providers over a short time horizon burdened by their existing infrastructure. For this reason, our thesis is centered on the ability to ramp staffing and beds to meet incremental (higher acuity) demand, stave off new entrants, and maintain cost controls. The way we see it, ACHC is stuck between the rock and [very] hard place we outlined last week.  It has a choice to either expand capacity through capex and acquisitions and pay up to staff the beds, or slow expansion, slow capacity utilization, and hunker down with the staff they have.  Given the data on wage inflation for workers, ACHC will have to make a decision to either continue delaying the projects they have in the pipeline in favor of maintaining better pricing metrics but sacrificing on top-line growth in the near term.  Either that, or management can de-prioritize typical hiring metrics in order to attract the necessary nurses, medical technicians, and licensed clinical social workers from newly formed, hybrid employers.

We believe the $85MM reduction (at the midpoint) in FY capex guidance given on the 3Q21 Earnings Call in October is likely the first indication of the dilemma ACHC is facing.  Utilizing the midpoint of its pre-COVID historical trading range, we expect 20%-35% downside from the current price with potential for further downside in the out years following poor performance in the near-term. 

Managing Director


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William McMahon
Analyst


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Justin Venneri
Director, Primary Research


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