SGRY: Flying Under the Radar

12/29/2015 9:06 am EST

Focus: STOCKS

Matt McCall

Founder and President, Penn Financial Group

There are a number of positive catalysts for the stock of this operator of surgical centers, says Matt McCall, of Penn Financial Group, who highlights each of them and explains that growth should accelerate according to the eight analysts that cover the stock.

A recent IPO that has been flying under the radar for the last few months has been outperforming its peers and the overall stock market. Surgery Partners (SGRY) began trading on the NASDAQ on October 1, 2015, and is up 14.5% since the close on its first day as a publically traded company.

SGRY operates a variety of surgical centers in the US. The three segments are surgical facility services, ancillary services, and optical services. The surgical facility services provide non-emergency surgical procedures for a number of specialties. The ancillary services segment includes diagnostic imaging, laboratories, urgent care facilities, and other services. The company also manufactures eyewear through the optical services segment. As of August 17, 2015, the company had 99 surgical facilities in 28 states.

Because the company is new to the public markets, the past numbers are not readily available, however, we do have numbers to help analyze the company today and looking ahead. According to the IPO filing, the company had pro forma revenue of $871.2 million in 2014, which represented a compound annual growth rate of 83% compared to revenue of $260.2 million in 2012. For 2015 the company is expected to earn $0.14 per share, from a loss in 2014.

The bottom line is that growth should accelerate according to the eight analysts that cover the stock. Earnings per share (EPS) are projected at $0.81 in 2016 and $1.20 in 2017. Based on 2017 EPS, the stock is trading with a P/E ratio of 17.3, suggesting higher prices in the coming 12-18 months due to the higher bottom line growth rate.

Technically, the stock is also attractive after it hit a new post-IPO high in early December. The old high of $20.00 was broken and since that time the stock has been consolidating above the old high, which is now an important support level. If the trend were to continue, the next target should be in the mid-$20s.

Yet another positive catalyst for SGRY is the sector in which it does business. The ambulatory surgery center (ASC) industry has been growing rapidly and the expansion should continue. Annual industry revenue is estimated to be approximately $23 with over 23 million surgeries per year. In 1980 over 80% of surgeries were inpatient procedures. As of 2012, that number is now closer to 15% as outpatient surgeries now dominate the industry. The ASCs are the biggest winners from this shift that should continue to move in their direction.

Matt McCall, Founder and President, Penn Financial Group

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