Surgery Partners (SGRY) IPO: Should I invest?

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Our newest series, 3-up, 3-down takes a look at new IPOs and offers up three reasons to invest in them and three reasons to avoid them. Then, you decide. Let’s take a look.

3 reasons to invest in the Surgery Partners (SGRY) IPO

1) Rapid growth. Surgery Partners operates 99 surgical facilities – five of which are surgical hospitals – across 28 states. 200,000 surgical procedures were performed in their surgical facilities last year. Surgery Partners managed that feat in the 11 years since the company was founded in 2014.

That growth has helped the company achieve “industry leading same-facility revenue growth of approximately 9% during 2014, and an average of approximately 8% annually on a pro forma basis from 2012 to 2014.”

“Our pro forma revenue for 2014 was $871.2 million, which represents a compound annual growth rate of approximately 83% compared to revenue of $260.2 million for the year ended December 31, 2012,” the company writes in its S-1 filing. “For the six months ended June 30, 2015, our revenue was $457.0 million, compared to revenue of $147.3 million for the same period during 2014.”

2) Acquisitions. Surgery Partners has a proven track record of acquisitions. “Acquiring facilities has been a core component of our strategy since inception,” the company writes. They focus specifically on how they can create synergies between their company and their target acquisitions. The right acquisitions allow them to reduce head counts, close offices and pay less for supplies thanks to bulk ordering. “As a result of our recent acquisition of Symbion, as of June 30, 2015 we have achieved annualized cost and revenue synergies in an aggregate amount of approximately $8 million. … We expect this acquisition to drive significant cost and revenue synergies over the next two to three fiscal years, which we estimate will ultimately exceed $30 million in the aggregate (an amount that includes the approximately $8 million of synergies realized as of June 30, 2015).”

Surgery Partners also acquired NovaMed, Inc. in 2011. That acquisition led to a $5.2 million reduction in expenses and generated $9.3 million in incremental revenue.

3) The right sector. Healthcare is outperforming the S&P 500 Index this year. It’s up 2.9 percent YTD vs. -2.92 percent for the S&P. Biotech’s taken a pounding recently, but healthcare staples like AMN Healthcare Services, Inc. (AHS), whic offers healthcare workforce solutions and staffing services to healthcare facilities, have performed better.

3 reasons NOT to invest in the Surgery Partners (SGRY) IPO

1) Gobs of debt. Between Surgery Partners’ two business units – Surgery Center Holdings and Symbion – the company’s holding nearly $1.8 billion in long-term debt. That’s greater than the combined revenues of both entities.

2) Thin margins. In the past few years, Surgery Partners has largely been operating in the red. That’s thanks to its acquisitions, but it’s also due to fierce competition in the healthcare space. Surgery Center Holdings “more than doubled revenue from 2011 to 2014, exceeding $400 million,” per Fool.com. “But across that stretch it was positive on the bottom line only once, and posted an attributable net loss of $66 million last year. As for Symbion, in its last stand-alone fiscal year (2013) its revenue grew by 9% annually (to $536 million), but attributable net loss dipped to almost $13 million.”

Fool.com points out one of Surgery Partners’ competitors, AmSurg (NASDAQ:AMSG), demonstrated a similar pattern over past few years: substantial revenue growth and very thin top-line growth.

3) Regulatory risk. Government regulations are increasingly worrisome for healthcare companies – a risk Surgery Partners is well aware of. “The amount that we receive in payment for our services may be adversely affected by market and cost factors that we do not control, including Medicare, Medicaid and state regulation changes, cost containment decisions and changes in reimbursement schedules of payors, legislative changes, refinements to the Medicare Ambulatory Surgery Center payment system and refinements made by CMS to Medicare‚Äôs reimbursement policies. For instance, cuts to the federal budget caused a 2.0% reduction in Medicare provider payments in 2013.”

DISCLOSURE: I do not have a position in SGRY, and I do not plan to initiate one in the next 72 hours.

Photo credit: Adam Ciesielski

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