ACHC | BA.5 Variant Suppresses Admissions, But Growth Strategy Continues to Accelerate
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Ticker/Company: ACHC Headline: Despite Subdued Admissions, ACHC's 2Q22 Earnings Result is Positive for SWB Margin and SF Volume Acceleration in the Back Half (7/28/22) Summary: ACHC released their 2Q22 Earnings Result yesterday after the close, including a beat on both the top and bottom lines and a FY22 guide raise. While we had expected additional upside in admission for the quarter, ACHC more than made up for the volume and staffing disruptions with additional PRF income from the Cares Act, a one time state payment, and tight maintenance of their SWB margin, which excluding one time payments was 53.1%, flat YoY and down sequentially from 54.4%. ACHC delivered HSD beats on both Adjusted EBITDA and EPS. Additionally, the company continued their bed expansion and facility openings while accelerating net new hires and maintaining LSD attrition. We are re- assured by Acadia's near- term growth prospects from these results and remain actively long on the Hedgeye Health Care position monitor. |
Thesis Update
Subdued by COVID Variant Waves, Volume Poised for Growth in Back Half
Prior to yesterday's 2Q22 Earnings Release, we hosted a Black Book to update subscribers on the data that supported our bullish view. In the deck, we highlighted the potential weakness in this quarter's admissions of -4.5%, lower than our Forecast Algorithm result of -1.4% and -1.9%. Notwithstanding, reimbursement rates across all payor types outperformed out MSD expectations, bed expansions (albeit lower than we expected) accelerated sequentially, and management re- affirmed their 2022 expansion plans. Based on our Locations Tracker, we believe that ACHC is on track to hit expectations of 150 bed expansions in 3Q22. We expect wage inflation (currently +5% pre- pandemic) continues to ease in the back half.
EBITDA Margins Benefitted from Additional PRF Support and SWB Margin Discipline
The company's reported 51.2% SWB margin displays continued improvement both YoY and sequentially, and management remarked that contract labor has returned to a LSD percentage of total that ACHC has historically maintained. The better than expected SWB line occurred even as the BA variant COVID wave led to a higher absenteeism among full- time employees. In line with our Locations Tracker, management reported that net new hires have continued to accelerate since March and attrition remains in the LSD range on an annualized basis (2.0%-2.5% according to our Tracker). These positive trends should only improve as the "tight labor market" continues to ease in the back half.
While CapEx Expectations Were Reduced, Not Likely a Bearish Indicator
ACHC did reduce their expansionary capex expectations from $290MM-$340MM to $240MM-$280MM for FY22. Management explained that the revision is an indication of the deferral of ongoing capital expenditure projects, not cancellations. There remains bed expansion opportunities on a same facility basis we think will be meaningful in the near term.
Key Slides
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