Adeptus Health: Zacks’ Bull of the Day Play

Adeptus Health (ADPTSnapshot Report) is a $1 billion operator of dozens of free-standing emergency hospitals and partnerships with premier healthcare providers in Texas, Colorado, Arizona, and Louisiana. Hopefully you and your family and friends rarely need their services. But if you do, they come well prepared and well recommended.

All Adeptus Health freestanding facilities, many under the brand First Choice Emergency Rooms, are fully equipped emergency rooms with a complete radiology suite of diagnostic technology (CT scanner, ultrasound, and digital X-ray), on-site laboratory, and staffed with board-certified physicians and emergency trained registered nurses.

According to patient feedback collected by Press Ganey Associates Inc., Adeptus Health provides the highest quality emergency medical care and received the 2013, 2014 and 2015 Press Ganey Guardian of Excellence Award for exceeding the 95th percentile in patient satisfaction nationwide.

The Sirens of High Double-Digit Growth

Since going public in 2014, Adeptus attracted a lot of attention early on that sent shares over $120 in the summer of 2015. While investor exuberance may have gotten ahead of the growth story then, shares were knocked back to earth and the pessimism swung the pendulum the other direction.

Looking at the growth numbers, many analysts justify a 25X to 30X multiple for this 30%+ growth story and come up with price targets near $100. Here were the highlights from the Adeptus top and bottom line earnings beats reported April 20 that keep analysts thinking in that direction and raising EPS estimates to keep ADPT a Zacks #1 Rank…

First Quarter 2016 Highlights

Systemwide net patient services revenue was $140.4 million versus $84.0 million in prior year, an increase of 67%

Net operating revenue was $112.8 million versus $81.5 million in prior year, an increase of 38%

Adjusted EBITDA was $21.7 million versus $13.3 million in prior year, an increase of 64%

Adjusted earnings per share was $0.47 and GAAP earnings per share was $0.32

Cash flow used in operating activities was $7.4 million versus $12.0 million in prior year

Net income attributable to Adeptus Health Inc. was $4.5 million versus $0.6 million in prior year

Same store revenue increased 12% and same store volumes increased 15% versus prior year

Opened seven freestanding facilities during the first quarter 2016

2016 Guidance and Expansion Plans

Management continues to expect systemwide net patient services revenue, which includes revenue from their unconsolidated joint ventures, of $635.0 million to $665.0 million for the full year 2016. They expect Adjusted EBITDA of $108.0 million to 113.0 million and Adjusted earnings per share of $2.50 to $2.60 for the full year 2016.

That $2.50 to $2.60 represents over 100% EPS growth from 2015. And 2017 estimates are seeing the potential for 50%+ growth.

Adeptus opened seven new freestanding emergency rooms during the quarter, including four consolidated facilities in Texas and three joint-venture facilities. The JV breakdown was two facilities in Arizona in partnership with Dignity Health and one in Colorado in partnership with UC Health.

The company remains on track to open 27 new facilities in 2016, consisting of 24 freestanding facilities and three hospitals, including a New Orleans hospital with an expected opening in Q4 and two hospitals in Denver and Colorado Springs in the second half. A Houston-based hospital is also under construction and is expected to open in 2017.

New facilities typically breakeven with $4 million in annual net revenue, but have historically generated in the range of $5 million-$6 million in annual net revenue within 15 months after opening. Average annual operating income, excluding depreciation and amortization, for new facilities has historically been between $1.0 million-$2.0 million, representing an operating margin of between 28-33%.

Whale-Sized Interest

ADPT shares have significant short interest, totaling nearly 6 million shares and requiring 10-15 days to cover at an average daily volume of 500,000. These players probably did well in the past year as the stock fell from $120 on Medicaid/Medicare reimbursement concerns and other emergency care liability issues.

Now they are scrambling to cover their short positions as the stock has surged above $60 in the past week since the company’s earnings “trifecta” — top and bottom line beats and raised guidance. But there is a group of investors with interest in ADPT that I find even more interesting than the shorts getting squeezed.

The institutional buyers of ADPT were hard at work in the fourth quarter of 2015, creating net accumulation of 18% of the float. Here were the top buyers in Q4, with an interesting bonus I’ll highlight in a moment…

The bonus is that the 3rd-largest buyer, Eagle Asset Management, is reporting their 640K share buy as part of their Q4 2015 13F filing, which is not due until May 15. Eagle runs $20 billion out of St. Petersburg, Florida and likes to concentrate its asset allocation in Healthcare (19%), IT (18%), and Consumer Discretionary (18%).

I like this list of smart money, including TPG, Columbus Circle, Federated, and Citadel. And that’s why I bought ADPT last week.

Disclosure: I own shares of ADPT for the Zacks Follow The Money Portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.


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