THE HEDGEYE EDGE
We have done a deep dive on birth trends in the United States coming to the conclusion that the trend is turning positive after the worst decline in 40 years following the Great Recession. In addition our medical consumption forecast models suggest a similar turn in medical utilization which continues to be impacted by post recessionary headwinds. For MD, who’s doctors care for pre-term babies in their Pediatrix division, and those of MD’s American Anesthesiology division, birth trends and medical utilization will be a key positive drivers going forward.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
In the short term, utilization and births remain below potential, but have improved from the lows from 2009-2011. In the first half of 2013, it appears the US Medical Economy hit a very soft patch in Q113, driving earnings misses at several companies related to MD. While trends have improved sequentially, we have yet to see a major inflection point in growth. While we are cautious on the slow pace of improvement to utilization and birth trends in the short term, our intermediate term analysis continues to point to recovery. In addition, the short interest at MD remains elevated, but has been on the decline since Q412. Following the past 3 spikes in short interest, the most recent being the largest, MD shares tend to perform well as short interest declines.
LONG-TERM (TAIL) (the next 3 years or less)
MD has a highly defensible business model where growth is highly dependent on acquisition growth. There are several structural changes taking place in the US Medical Economy which will continue to present an opportunity for MD to acquire growth for an extended period. These structural changes favor large practices over sole practicioner offices. Managed Care negotiations, medical liability insurance, and information technology, are all conspiring to raise the cost of operating a successful practice. As a result MD continues to comment on a robust pipeline of acquisition candidates. Consolidation in the US Medical Economy will reward those who have a successful strategy with stronger pricing power and operating efficiency, and punish those who don’t.