Takeaway: We are moving MD to an active long in the Health Care Position Monitor. Join us Monday, December 30 @ 2 PM ET.

Call Now | MD | Best Idea Long | Worse Than it Looked, but Better Than it Seems - md1

MD | Best Idea Long | Worse Than it Looked, but Better Than it Seems

Please join us on Monday, December 30, 2019 @ 2 PM ET - Add to Outlook Calendar

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Healthcare & Health Policy SubscribersCLICK HERE for event details (includes video link, materials link and dial-in).

BACKGROUND

We have a long history with MD mostly on the short side.  Heading into 2020 we think there is a high probability they turn the business around and begin to make modest but critical improvements.  Our risk range is from $24.66 to $44.65 or an upside/downside scenario of -12% to +60%.  

Thesis Points 

Shrink to grow - We've developed tools that track same practice physician head count.  By shrinking anesthesiology as a percentage of total, the company, we believe, can improve margins.

Manage same units better - If MD was in as bad a shape as we thought, there should be more than enough low hanging fruit as their turnaround initiatives take hold. Our analysis shows that the turn may be already underway as 3Q19 results were one of the best on record when we compare it to our adjusted same unit growth rates.

Acquisition growth improves modestly - MD has slowed their acquisition pace.  We expect modest re-acceleration in 2020 and beyond.

Forecast Algorithm - As with THC and other names we cover, we have developed techniques that convert our analysis of the US Medical Economy to an input for our models.

Price follows EBITDA estimates - Shares carry a 0.81 correlation to forward EBITDA estimates.  As estimates accelerate toward our more positive 2020 outlook, we expect the shares to follow. 

Downside Risks

Wage inflation - Health care wage inflation has been substantial in recent quarters.  Fortunately, embedded in Medicare reimbursement for 2020 is a 3% increase which should help offset a tight health care labor market.  

Acquisition multiples - The tide went out for MD when acquisition multiples went from 4-6X trailing EBITDA to 8X and higher. It may be that MD never returns to the acquisition market in a meaningful way.

Out of Network Billing - The issue of "surprise bills" has gripped health care Washington all year. Despite bicameral/bipartisan agreement, a decision on the issue was punted until May 2020. While MD discloses little in the way of out of network billing, the eventual outcome is still going to influence network negotiations regardless of current exposure to the problem.

Thomas Tobin
Managing Director


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Emily Evans
Managing Director – Health Policy



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