Morningstar | Growth Trends Continue to Move in Right Direction During Surgery Partners' 4Q
No-moat Surgery Partners reported fourth-quarter and full-year results that were modestly ahead of our expectations, driven by continued strength in same-facility revenue growth. As we update and roll our model, we don't anticipate making sizable adjustments to our long-run forecast and will probably see only modest changes to our $19 fair value estimate, equating to roughly 10.5 times our adjusted EBITDA estimate for 2019. While the stock currently trades at a sizable discount to our valuation, we'd emphasize our very high uncertainty rating as a point of caution to prospective investors.We continue to be encouraged by the apparent success of CEO Wayne DeVeydt's payer-focused growth strategy, which has reinvigorated the firm's same-facility growth trajectory, and the ongoing cost-rationalization initiatives, which have underpinned roughly 100 basis points of margin expansion over the course of 2018. The company posted 7.4% same-facility revenue growth in the quarter versus 1.6% in the year-ago period and 11.4% in the third quarter. This was driven by case growth of 1.1%, the highest rate since the beginning of 2017, and revenue per case expansion of 6.3%. Notably, the firm's strong margin and price metrics were achieved despite roughly 200 basis points of mix shift toward lower-margin Medicare patients during the fourth quarter.
Management's outlook for 2019 is for revenue growth in the low single digits versus our forecast nearer a high-single-digit pace. The bulk of this shortfall stems from two surgical hospital divestitures late in 2018, which contributed roughly $70 million in revenue to the enterprise at below-average margins. We continue to view the firm as a high-single-digit revenue growth business over the longer term, as mid-single-digit organic performance is augmented by management's ongoing tuck-in acquisition strategy.
Surgery Partners is a holding company. Through its subsidiaries, the company is a healthcare services company. The company operates in three reporting segments : Surgical Facility Services, which consists of the operation of ambulatory surgery centers (ASCs) and surgical hospitals; Ancillary Services, which consists of a diagnostic laboratory and multi-specialty physician practices; and Optical Services, which consists of an optical laboratory and an optical products group purchasing organization. As of Dec 31 2017, the company owned or operated primarily in partnership with physicians, a portfolio of 124 surgical facilities comprised of 106 ASCs and 18 surgical hospitals across 32 states.
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