A 'Toxic Cocktail' Brewing for A Best Idea Short

Takeaway: The 1Q17 pre-announcement is not the end of the story for MD, or the industry. Rising labor costs and slowing volume is a toxic cocktail...

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OVERVIEW

There is likely more downside for Mednax (MD) even after the company's pre-announcement today.  Maternity trends continue to be weak, U.S. medical consumption appears likely to decelerate further in 2017, and a new theme we'll present today at 2PM ET, nursing labor costs are likely entering a wage spiral.

 

We’ll present the chart below showing 0.30% of excess nursing labor supply in the U.S., which strongly suggests MD’s problems with “salaries and benefits expense, primarily for non-physician clinicians” is going to deteriorate further and rapidly even from here.  It also implies a significant and emerging problem for providers in the U.S.

 

  • Lower same-unit revenue driven by a shift to government payors and lower neonatology volumes which had a combined unfavorable impact of $0.11 per share; and Medicaid volume likely ok, but consistent with maternity Tracker commercial and high revenue and margin maternity dropping.
  • Higher practice compensation expense, primarily for non-physician clinicians which had an unfavorable impact of $0.02 per share. This is likely structural and gets worse.  It’s a key theme we will present today on our call and broadly negative for providers especially HCA.
  • Net revenue of $836 million, $840 consensus
  • Net income of $55 million, $66M consensus
  • EBITDA of $132 million, $149 consensus
  • Earnings per share of $0.59, $0.71 consensus
  • Adjusted EPS of $0.75, $0.87 consensus
  • Same-unit neonatal intensive care unit (NICU) patient days are expected to decline 2.1 percent compared to the prior year period (1.0 percent when adjusted for one fewer day in 2017), reflecting a decline in total births at the hospitals where MEDNAX provides neonatology services of 2.9 percent (1.8 percent when adjusted for one fewer day in 2017). Maternity Tracker has been flagging this through 1Q17 and into 2Q17
  • In addition, higher than expected practice salaries and benefits expense, primarily for non-physician clinicians, is expected to impact the Company’s Adjusted EPS unfavorably by $0.02 from what was anticipated within MEDNAX’s previously reported first-quarter outlook. This is a new threat to the industry we will cover in detail today on our Health Care Themes call at 2PM ET.

 

A 'Toxic Cocktail' Brewing for A Best Idea Short - hourly rate 2

 

A 'Toxic Cocktail' Brewing for A Best Idea Short - Maternity 2

 

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We hope you can join us for our 2Q17 Healthcare Themes Call this Thursday, April 20th at 2:00 PM ET.  We will provide a comprehensive update of our #ACA2.0 thesis including a review of the politics and policy of repeal and replacement including a look at the stability of the individual market, the future of Medicaid expansion and how the states may just leave Washington behind.

 

Since the election we have seen what we believe is an unsustainable rally driven primarily by relative multiple expansion. Additionally, we believe Healthcare investors viewed the failure of the AHCA as an “all clear” signal to increase long exposure. While this has been the right positioning in 1Q17, the reality is for most of healthcare, the story hasn’t changed; estimates have moved lower as the fundamentals continue to deteriorate.

 

Please contact sales@hedgeye.com for further information. 

Key MaCRO AND fundamental Topics

  • Hedgeye’s Best Longs and Shorts in Healthcare
  • Analysis of the Insured population by payor continues to slow in early 2017
  • Medicaid is overenrolled, and by a wide margin in some states.  Disenrollment looks likely. 
  • How accretive will it be if additional states expand Medicaid? (Not very much in our view)
  • Clinical Trial trends are slowing, are the CROs a short?
  • Maternity trends continued to slow in 1Q17, particularly in Texas, according to our Maternity Tracker.  Should we be pressing our MD short and looking for more maternity related ideas? 
  • The post-election rally looks like Multiple Madness and not a harbinger of accelerating fundamentals. What's embedded in multiples consensus estimates?
  • Hard and soft data, is it relevant to the US Medical Economy?
  • HDHP penetration is 30% and rising, what happens to medical consumption as cost shifting occurs?
  • The nurse labor market appears set to touch of a massive wage spiral for US Providers
  • Update on the political landscape for repeal and replacement – the agreements, the disagreements and the path to victory
  • How does the FY 2017 spending bill affect ACA and other areas of health care?
  • Insurer participation and outlook for plan pricing in individual market – is the market stable or not?
  • Increased Congressional oversight of Medicaid enrollment and eligibility
  • The shifting paradigm for Medicaid expansion
  • State innovation overtaking federal policy 

KEY POLICY TOPICS

  • Update on the political landscape for repeal and replacement – the agreements, the disagreements and the path to victory
  • How does the FY 2017 spending bill affect ACA and other areas of health care?
  • Insurer participation and outlook for plan pricing in individual market – is the market stable or not?
  • Increased Congressional oversight of Medicaid enrollment and eligibility
  • The shifting paradigm for Medicaid expansion
  • State innovation overtaking federal policy 

CALL DETAILS

Ping sales@hedgeye.com for more information. Please note if you are not a current subscriber to our Healthcare research there will be a fee associated with this call.

ABOUT HEDGEYE

Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing.

 

The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.


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