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USPH Basics:
- Low expectations for growth despite multiple growth drivers accelerating. The $150M secondary primes the balance sheet
- Long Thesis:
- The end of the pandemic
- Pent up Demand
- Easing labor scarcity and wage inflation
- M&A favors strategic buyers
- Temp staffing rates are in retreat
- HHS has been surveying hospital capacity and labor availability since July 2020
- The Healthcare labor market is 400k openings from reverting back to the pre-COVID trend
- Healthcare employment strengthened sequentially +39.6K month over month in April 2023, vs +31.2K in March
- Wage growth picked up slightly in April 2023 at 4.3% vs 4.1% in March, and accelerated on a 2Y bases to 5.9%
- Aggregate weekly hours continues to inflect with a MoM increase April 2023 of 1.0M hours, and a new all-time high
Hospital Demand:
- General medical and surgical hospitals deferred demand
- Hospital care has never recovered to trend and continues to build the deferral pool
- Compared to the pre-pandemic trend, the US General and Medical Surgical Hospitals have built up 391,000 Aggregate Weekly Hours among Production and Nonsupervisory Workers, greater than twice the current Aggregate Weekly Hours reading as of October 2022
- It takes staff to deliver care and the gap in aggregate hours is proportional to the amount of care that was deferred and will return either as incremental patient volume or sicker patients with higher acuity. In either scenario, we should expect above trend volume for an extended period
- Aggregate weekly hours for nonsupervisory workers reflect patient demand best
- Lockdowns created a -25% divot in volumes which took 2 years to get back to break out above Feb 2020 levels
- We like Aggregate Hours as an indicator of demand and used it to calculate deferred care; the cumulative sum of differences between trend and reported weekly hours for PT industry
- Actual reported hours worked is approaching the pre-COVID trend, but the cumulative deferred care puts demand at +500% the current run rate
Physical Therapy Industry:
- Physical therapy industry is consolidating
- The same data shows within just the short time frame from February 2022 to May 2023 its evident the industry is consolidating
- Headcount by individual clinic: Headcount dropped in July in CMS data and guidance was slashed on 2Q22 earnings Aug 8th. Our data shows the drop and then follows the rebound into the upside USPH reported in 1Q23
- Our same facility therapist growth estimate is 3.2%
- 46 of the USPH subs we identified are adding therapists versus 25 that are losing therapists, with the aggregate same store growing +3.2% overall between 1Q22 and 1Q23, compared to Visits per clinic per day was up 6.8% in 1Q23
- Our growth algorithm can simplify to industry growth for per therapist volume, therapists per clinic, plus M&A
- Physical therapy demand is accelerating
- We are looking for upside to ~$135; there are several places in our assumptions could be low. They could be high too and our expected multiple range could be too optimistic, but if same unit growth could be consistently in the mid to high single digits, half from demand and half from headcount, plus expansions, acquisitions, and de novos we are very likely low. The stabilizing wage environment should allow for incremental drop through to EBITDA
Catalysts | Dashboards & Risk Monitors:
- Plenty of updates coming to track our progress against the thesis
- We have a schedule of upcoming data updates to track over the coming months that we expect will provide the visibility we need. From what we see now, there has yet to be an inflection point to the downside
- Claims index for “Physical Therapy”: Updates on a monthly basis, with improvements planned
- BLS/JOLTS : The aggregate wage environment for Health Care has been improving. Physical Therapy has been a laggard, but we see evidence of improvement. We don’t see any issues that could
- CMS Revalidation Reassignment: The subsequent updates should help square same clinic head count growth and market consolidation. There are additional ways to leverage the data we are looking at
- Expert Interviews: We spent the last several weeks speaking with experts from across the Health Care Industry regarding M&A. The conclusion is the higher rate environment, labor issues of 2022, and market volatility has put a damper on financial buyers. We’ll be moving on to clinic operators next
