THE HEDGEYE EDGE
After holding a negative view on Mednax (MD) for well over a year and close to a -50% decline, we removed it from our active short calls after 3Q17 results. We added Mednax to the long side of Investing Ideas in February.
We believe maternity trends will be positive for 2018 as we comp out of Zika. Maternity could be an even bigger driver if we are finally seeing a broader and long overdue recovery. With maternity recovering and management finally tackling productivity problems at American Anesthesiology, the margin opportunity is substantial.
4Q17 EARNINGS RESULTS & 1Q18 GUIDE
MD beat its 4Q17 0%-2% guidance for same unit revenue growth and reported 3.9% same unit revenue growth. The result was built by better volume of +2.4% and pricing of +1.5% with both NICU days (+2.6%) and Anesthesiology (+3.0%) performing well. The improvement agrees with our ‘ZIKA Theory’ where NICU volume was up +2.6% and government shift improved +50bps despite continued headwinds in payor mix in Anesthesiology. Reported EBITDA was marginally better at -8% YoY versus the guide of -10% to -15%, although the upside was due primarily to revenue upside, not Practice Salaries and Benefits margins.
Guidance for 1Q18 same unit revenue growth is 2%-4%, substantially better than 2017 results, EBITDA in line with consensus, and EPS better than consensus at $0.84-$0.89 versus consensus of $0.79, largely due to a lower tax rate of 27.5% versus consensus of 30%. Management guided for a 2018 tax rate of 26-27% for the full year, well below current consensus estimates.
THE ACTIVIST PUT & BOTTOM LINE
Recently, we highlighted our expectation for accelerating consolidation among physician groups and a nascent recovery in maternity. We expect the tailwind of physician consolidation will improve deal volume, a substantial revenue driver for MD historically. Additionally, our Maternity Tracker data has been forecasting a recovery in birth trends heading into 2018, a positive tailwind for ~50% of MD revenue and likely margins.
Combine this with activist pressure to address productivity and mix problems in Anesthesiology. Activist investor Elliott Management had taken a 7% stake near $43 a share.
Management stated several times that re-negotiating physician contracts will "not be an easy conversation to have" but that they hope to make progress "in the next couple of quarters." To our ear, this approach sounds absurdly gentle and slow. If even a few of the anecdotes we've heard are true, and management has the contractual option as we learned today, a more urgent approach seems more appropriate given the magnitude and pace of the margin deterioration over the last 18 months.
We expect these factors to provide upside to volume and margins over the coming year and support a share price into the mid $60s.