THE HEDGEYE EDGE
Our healthcare team utilizes a combination of proprietary as well as publicly available data to forecast organic growth. The bottom line here is that this data doesn’t augur well for Mednax (MD). We expect it to continue its decelerating and declining trend for Mednax’s organic volume trend.
We continue to see declines in our Maternity Tracker and believe the company's recent gains have been driven by multiple expansion and not with fundamental revisions higher, as with most of our companies.
Rather, 1Q17 guidance has resulted in negative revisions for the company, tying the rally more to the market and the confluence of Trump Administration reforms across tax and healthcare policy reforms. Based on our additional research, we also expect the acquisition led revenue growth model to remain broken, with excessive and unprofitable acquisition multiples driving margins lower. In other words, we strongly recommend investors short MD.
INTERMEDIATE TERM (TREND)
Margin recovery in the poorly timed and executed vRad acquisition will occur slowly in 2017, but we don’t believe will offset underlying operating trends elsewhere.
Furthermore, we have continued to see declines in maternity trends in our Maternity Tracker through February 2017 while management continues to expect "demographics" to lead to a reacceleration. The extra day in February 2016 is skewing the results somewhat, but on a rolling 3-month average, the trend is consistent in the -2% range and is pointing to -1.7% declines in 1Q17.
Mednax reported same unit NICU patient days down -1.8% in 4Q16 compared to our Maternity Tracker result of -2.8%. With same unit volume, down -0.7% overall, we estimate the non-maternity volume trend was +0.6%, a weak result. In addition, sources of growth continue to slow and Return on Invested Capital (ROIC) is trending lower.
LONG TERM (TAIL)
We've used Medicare data to identify and count physician numbers by practice. When purchased, vRad had a total of 350 physicians according to Mednax filings, and 400 at the end of 2016. As of today, the count has increased to 411.
As the company noted during the call, the 500 contracted radiologists will be coming online throughout 2017. The margin impact is less certain, in our view. The vRad narrative continues to disappoint, which we believe is now spearheading a quality dilution in the MD physician portfolio as they turn to brick and mortar radiology acquisitions. We also assume acquisition multiples will remain high given management's comment that multiples remain "unchanged".
With slowing organic growth and a large same store base, combined with excessive acquisition multiples for the bulk of their revenue growth, we believe the long-term health of the business will come under investor scrutiny.
This will lead to volatility in results, as we have already seen, a more levered balance sheet, and a lower multiple paid by investors for the shares. We expect to see a stock in the mid $40s as births, employment, and acquisition growth slow and ROIC continues to fall.
ONE-YEAR TRAILING CHART
