MD | Maternity Tracker Update December 2015
Based on our data which allows us to track birth (primarily commercially insured and higher income) by state and month, we’ve built a state-weighted index based on MD’s practice exposure.
Recession, Housing, Birth Recovery in Question
Births remain below potential based on the demographic growth of women of child-bearing age, however, our Maternity Tracker and Current Population Survey (CPS) point to declines in the recent periods. By our oversimplified arithmetic based on the reported mix shift to government payors, commercially insured births fell by 1% during 3Q15 for MD. In our Maternity Tracker , trends in Texas are turning negative on a year over year basis with Florida showing its first major deceleration in several months, two of the most critical states in MD’s portfolio. As our Macro Team (Keith McCullough) detailed yesterday, the risks of a recession in the US during 2016 are increasing rapidly. Additionally our Housing Team (Christian Drake, Josh Steiner) have an increasingly bearish view of housing market trends, which historically correlates well with birth trends.
Consensus Estimates and Guidance
With the updated Maternity Tracker data through December 2015, we feel more confident in our revenue estimate of $738.3M for 4Q15, marginally below current consensus of $748.0M. Our estimate assumes same unit volume of -1.2%, flat core pricing, and -2.4% Parity contribution, and $47.5M in revenue from vRad. Growth coming from other acquisitions should be down sequentially with MD failing to close any additional practice deals during 4Q15 and we are not modeling any contribution from Alegis Revenue Group given the lack of details disclosed.
MD guided to same unit revenue growth of “flat to two percent higher” for 4Q15 net of a parity headwind of “two percent.” More importantly, we expect it is more likely to hear disappointing guidance for 1Q16 and beyond relative to expectations given the different aspects of our short thesis accelerating from here.
$750M Senior Notes, But No Deals Yet
MD placed $750M in long term senior notes on December 8th 2015, for “acquisitions and general corporate purposes.” In several conversations we’ve heard commentary regarding the risk to a short here in front of a major acquisition. We agree with the assessment accepting that we believe the potential deal is already reflected in the current estimates, multiple, and price of MD shares. We’d note as well that MD failed to close any practice acquisitions during 4Q15 and only recently added 9 physician anesthesiology group earlier this week.
Our short thesis was first posted mid 2015 and revolved around several points.
#ACATaper – growth in anesthesiology and radiology will be impacted as incremental and pent-up demand from the ACA wanes to a negative contributor in 2016
Maternity Slowdown - as seen in the Maternity Tracker
Acquisition Stress - more competition for deals, higher multiples, lower long term accretion, vRad perhaps reflects more competitive acquisition environment, benefits cited by management are overstated based on industry interview
Multiple Compression - MD shares remain extended despite the risks to growth
Call or email if you have any questions our would like to see the supporting data detailed here.