1 Massively Undervalued Healthcare Stock

Given the essential nature of pediatric healthcare, the sector has exhibited a high level of resistance to economic downturns in recent decades, making the industry an excellent choice for risk-averse investors.

However, just because a stock might be considered a safe and stable bet doesn’t imply a lack of capital growth opportunities. Indeed, one company, Pediatrix Medical Group, Inc. (NYSE:MD), is currently trading at 45% below its fair value of $25 per share based on a discounted cash flow analysis.

But is the firm cheap for a reason – or does Pediatrix’s lightweight valuation offer an excellent entry point into a well-performing business?

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What Does Pediatrix Do?

Pediatrix Medical Group is a physician-led organization that collaborates with individual hospitals to develop tailored plans that cater to their specific needs. The group works closely with each healthcare provider to ascertain their goals and priorities before designing a program that tackles those issues head-on.

Indeed, the corporation delivers customized solutions that encompass physician staffing, clinical research, and various management services.

For instance, MD handpicks exceptional physicians – such as neonatologists and maternal-fetal specialists – and stations them in facilities throughout the United States. This staffing service ensures the provision of first-rate medical services in different healthcare settings, such as neonatal intensive care units, pediatric emergency departments, and labor and delivery units.

Moreover, Pediatrix is also engaged with clinical research services through its dedicated R&D division. This division conducts clinical trials in prenatal and pediatric subspecialties, which advances medical knowledge and generates revenue for the company.

Additionally, Pediatrix Medical Group offers hospitals and healthcare operators management services such as training, research, and consulting. These services assist healthcare providers in optimizing their operations, improving patient care, and keeping up with industry trends.

Latest Pediatrix Quarterly Earnings Round-up

Although MD did record a marginal 1.8% improvement to its top line of $491 million during the three months that ended March 31, the company still missed analyst estimates by $1.1 million.

Conversely, the company actually beat the Street’s earnings target by $0.01 to bring in a per-share adjusted profit of $0.23 in the first quarter of 2023.

However, that bottom-line metric was down a third from the $0.33 it made a year ago – and even more than the $0.47 it reported in the previous quarter too.

It was also a mixed story when it came to operating results as well. For instance, the company experienced a 2.0% increase in overall same-unit revenue, with consistent demand for specialized healthcare seeing same-unit revenue from hospital-based patient services grow by 1.1%. Moreover, office-based patient services saw even stronger growth with a 4.0% increase in same-unit revenue, highlighting Pediatrix’s ability to expand its reach beyond just the hospital setting.

And yet, the firm recorded no miscellaneous revenue attributable to the CARES Act, compared to the $10.4 million it took in the prior-year period. Consequently, the company’s same-unit revenue from net reimbursement-related factors decreased by 2.2%, impacting its financial performance.

That said, revenue cycle management operations did demonstrate some recovery, leading to enhanced collections and increased same-unit revenue. Notably, Pediatrix experienced improved reimbursement-related factors, which contributed to a 0.4% rise in same-unit revenue. This was partly due to more efficient revenue cycle management activities, although it was partially offset by a decrease in relief recorded from the CARES Act and a decline in the percentage of patients enrolled in commercial insurance programs.

In terms of expenses, practice salaries and benefits increased to $362.2 million for the first quarter of 2023, primarily due to same-unit clinical compensation increases and salary adjustments resulting from acquisitions. On the other hand, general and administrative expenses decreased to $59.1 million, driven by cost savings from net staffing reductions completed over the past year.

Is Pediatrix Medical Group A Buy?

There are plenty of reasons to be bullish about MD’s fortunes right now.

To begin with, the company turned a $21.2 million net loss from continuing operations in the first quarter of 2022 into a positive net income of $14.2 million this time around, despite its total revenues remaining flat year-on-year.

Furthermore, from a valuation perspective, Pediatrix appears extremely cheap compared to the broader Health Care sector as a whole.

For example, the firm boasts a forward non-GAAP price-to-earnings ratio of just 8.80, while the industry median stands at a much higher 19.38.

In fact, when other medical service providers have witnessed a return on common equity of negative 43.31%, MD is sporting a staggering 10.94% instead.

Nevertheless, Pediatrix Medical Group’s financial position and cash flow situation require careful scrutiny.

Indeed, the company faces a significant challenge regarding its liquidity position, with only $6.1 million in cash and cash equivalents and a substantial total outstanding debt of $752 million.

One cause for concern is the reality that Pediatrix employed more than $100 million to finance its ongoing activities in the initial three months of 2023, signifying an alarmingly elevated rate of cash consumption. Given its limited financial resources and mounting debt load, the enterprise could encounter challenges in fulfilling its monetary commitments in the future.

Considering Pediatrix’s weak liquidity situation, investors should carefully evaluate the potential risks and implications involved. MD’s ability to address its cash flow challenges will be critical for its long-term financial stability, wherein due diligence and a comprehensive assessment of the firm’s balance sheet management will be crucial factors when considering an investment in this otherwise attractive enterprise.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.