Morningstar | Organic Growth Remains Robust in Surgery Partners' 1Q
Surgery Partners reported first-quarter results that were largely in line with our outlook for the full year. As a result, we don’t intend to alter our model or $19 fair value estimate, which equates to roughly 10.5 times our adjusted EBITDA forecast over the next 12 months. The shares continue to look undervalued, but we'd emphasize our no-moat and very high uncertainty ratings.Overall, the company posted a fairly good quarter. Same-facility volume was up 60 basis points with revenue per case increasing 4.3%, putting total same-facility surgical revenue growth near 5%. Adjusting for the one fewer surgical day compared with the year-ago period, same-facility case growth would have been nearer 2.2% versus roughly 1% during the second half of 2018, implying adjusted revenue growth of 6.7%. This is consistent with our long-run expectations for high-single-digit revenue growth over time. On the margin front, adjusted EBITDA expanded 70 basis points year over year despite modestly negative payer mix. Management's focus on recruiting physicians in high-contribution-margin specialties appears to be paying off, with sizable growth in both spine and large joint procedures.
The firm's substantial debt balance likely remains a key concern for investors, in our view, especially in light of management's focus on expanding the company into its existing capital structure rather than reducing leverage outright. We'd highlight that the bulk of its debt is effectively fixed-rate after entering into interest-rate swap agreements last year. Further, management refinanced its 2021 bond during the quarter, pushing out the firm's first maturity to 2024.
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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