Surgery Partners (SGRY): Overpriced Stock Poised To Become Tomorrow's Laggard

by Sonya Colberg, Senior Editor - 6/15/2016 10:10:17 AM

Surgery Partners (SGRY) may look like it's dressed to party. But when the lights come on the stock will reveal its true common, indistinguishable gawky self. And investors will want to run the opposite direction.

So today's wildly overvalued SGRY is poised to become tomorrow's laggard.

The company stock hit the Nasdaq last October, opening at $17.55 per share, far below the expected $23-$26 range. The disappointed company focusing on short-stay surgical centers needed every penny possible to help repay more than $1 billion in debt.

SGRY doesn't stack up when you consider what you pay for the stock versus what you get for it.

Indeed, SGRY appears to be the type of stock billionaire investor Carl Icahn referred to when he issued a recent warning. He said stock prices have been pushed artificially high but lack the economic fundamentals to support those prices.

The guy who grew up on the mean streets of Queens recently rattled cages of the nation's shareholders when he predicted a "day of reckoning" will correct this imbalance (video here).

(Source: YouTube)

Investors may find other viewpoints here. Meanwhile, check out TheStreetSweeper's top six reasons we consider SGRY a "day of reckoning" poster child...

*1. Overpriced Today: Laggard Tomorrow

SGRY sports an outlandishly high valuation ... A price-to-earnings ratio of 639.

That's right.

Stocks with extreme valuations are shouting to investors, "We're really expensive. You can bet it'll be tough to live up to these expectations!"

The Wall Street Journal reports that the most expensive stocks - measured by various valuation metrics - have underperformed the S&P 500 by 5 percentage points yearly, lagging in 25 of the last 35 years.

Rivals Surgical Care and AmSurg are bargains compared with SGRY. In each of four critical measurements from P/E to net income/loss, SGRY comes out in the red:

(Source: Yahoo Finance, here, here, here)

We can't imagine how anyone can justify paying 25 or 42 times more for a company that offers a fraction of competitors' value .... and is unprofitable to boot.

*2. Earnings: Extremely Poor While Competition Rises

Small surgical centers are popping up all over the country. Competitors are vying for every other street corner and every doctor who needs to perform surgery on every hurt knee or misaligned jaw.

Heavy competition is good for patients. But the highly competitive business can also cut into companies' profits because discounts and favorable pricing may be needed to keep customers happy (page 9 and 26 here).

Acquisition costs pack a punch, too.

The chart below indicates how issues such as competition and acquisition costs can rough up a company like this:

(Sources: Company SEC filings pages F-5, 51, 59 here)

After two years of big losses, the company finally brings in $959 million in revenue in 2015 ... and ends up with a puny $1.4 million in the black!

And those are mousy margins ...15% .... worse than two years ago.

*3. Awful: Quarterly Results

What about the first quarter 2016, when investors hoped to see a chunk of change from the Symbion acquisition? Our chart indicates deterioration:

(Source: Company SEC filing)

Thanks in part to laboratory rate cuts by CMS (Medicare/Medicaid),the losses and margins just got worse. We wouldn't be shocked to see more of the same ...  It's a tough business, after all.

Some analysts are taking note of all those fundamental issues standing in front of SGRY ...

*4. Fundamentals: SGRY Rated Worst; New Ho-Hum Analyst Rating

SGRY has received some positive coverage from analysts who estimate 2016 earnings of just over $2. For example, the stock just got an "overweight" rating and sort of a half-hearted $21 price target for the year as KeyBanc Capital Markets initiated coverage.

But the fundamentals keep biting SGRY.

S&P Capital IQ gave the company the lowest ranking among a dozen companies in the industry.

SGRY received the lowly "hold" rating. But the two companies we compared with SGRY in the chart above fared much better. Surgical Care Affiliates received a "strong buy" and AmSurg Corp. took home best of show with five stars.

And SGRY's fundamentals also received Thomson Reuters' worst possible rating of "1." Low profit margins, high debt and no dividends for shareholders all contributed to the "weak fundamentals" ranking.

Here's a visual comparison of SGRY with a few peers. Note SGRY's paltry blue blocks indicating fundamentals, compared with the far healthier blue blocks of four rivals:

(Source: Thomson Reuters)

(Source: Thomson Reuters)

*5. Paltry: Institutional Ownership

SGRY has had plenty of time to attract attention from big banks. But institutions don't seem very interested.

Yet financial institutions own more than 99 percent of peers Surgical Care (SCAI) and AmSurg (AMSG).

*6. Caution: Rolling Up Companies

SGRY is the product of two initial acquisitions, beginning with publicly traded surgical center company NovaMed in May 2011.

The second acquisition came in November 2014, when SGRY took on a boatload of debt - over a billion dollar loan -  to acquire private surgical center owner Symbion. 

What did Symbion's $792 million price tag pay for? It bought a company whose net loss had been increasing over the three previous years. By the time SGRY acquired it in 2014, Symbion's loss for the year had hit $16.9 million.

This situation speaks to what Mr. Icahn warns has become all too common with today's companies:

"What they do with the money is almost perverse...

"They just go in and buy another company to show the analysts on Wall Street their earnings are going up so their stock will go up."

(Source: YouTube)

"It's financial engineering at its height."

Indeed, SGRY is among those companies that continue rushing down the merger and acquisition street.

SGRY management talks about "synergy," expected in acquisitions. Ahhh, we wish we had a dime for every time a company blah-blahs about the synergies expected in their latest acquisition.

Mr. Icahn also called out this acquisition and synergy bologna in his video. Companies don't trumpet stock compensation, restructuring, intangible assets. They ignore the costs of taking over another company.

"Yeh, it's like taking a drug, you know? " grumbled Mr. Icahn.

"So those companies can show a huge EBITDA number that we all know is not going to be there in two, three more years."

*Conclusion: You're Dead To Me

If someone handed SGRY to Shark Tank's "Mr. Wonderful," he would probably weigh in with the classic Kevin O'Leary dismissive comment .........

"You're dead to me."

(Source: YouTube, CNN)

Waaayyyy overvalued SGRY should expect investors to turn on their heel and walk away until the company can offer much, much more bang for the buck.

The company offers nothing proprietary. Nothing new. Nothing to distinguish it from the other players crowding the surgical center dance floor.

There is no growth left in this stock. As the company begins to align with the sector's valuation, it's all downside for SGRY.

This stock needs to swoon by about 40% or more.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in SGRY and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.

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