Description

Pediatrix Medical

Pediatrix Medical (MD) is a provider of physician services for neonatal care (babies born prematurely or with complications), maternal-fetal care (high-risk expecting mothers), and pediatric cardiology care.  The company operates over 365 NICUs in 33 states as of December 2023 of the estimated 1,424 NICUs in the US (National Library of Medicine).

The company trades for 5x EV/EBITDA and 7x EV/Unlevered FCF with ROTC above 100% as there is minimal capex and PP&E.  Cash conversion (EBITDA to CFO) is 70% and has been consistent over the years. 

Essentially, Pediatrix is running the NICU in hospitals or providing maternal-fetal subspecialists to physician offices or hospitals.  Hospitals outsource this specialized function to decrease costs, difficulties in recruiting and retaining specialized physicians, and/or due to complex billing procedures.  Mednax was the company’s prior name, a high-growth serial acquirer, which blew up.  Over the last several years, new management divested several specialty groups, lowering the debt levels to 2.2x net debt/EBITDA and refocusing the company on the NICU and maternal-fetal specialists. 

The services that MD provides will always be needed even if birth rates continue to decline.  Of the over 3.6 million births in the United States annually, it is estimated that 14%-15% require NICU admission. Some common contributing factors include the presence of hypertension or diabetes in the mother, lack of prenatal care, complications during pregnancy, drug and alcohol abuse and smoking or poor nutritional habits during pregnancy. The company positions itself in metropolitan areas where MD’s maternal-fetal specialists are coordinating efforts with affiliated neonatologists.  Therefore, pregnant women who have complications or are at risk of a premature birth are being cared for to reduce an adverse outcome (morbidity) and improve neonatal outcomes. 

Why is Pediatrix Medical trading at such a low multiple on FCF

In May of 2021, Pediatrix hired R1 RCM as their outsourced revenue cycle management provider.  This agreement was to have a meaningful cost savings for MD, however, over the next few years, there were problems integrating RCM’s software, causing the AR cycle to lengthen.  There was a $30mm hit to EBITDA in 2022 and 2023 due to this failed integration.  Pediatrix has now shifted to a hybrid model for payment collection, rehiring staff to make sure the company is paid in a timely manner.  The switch to Guidehouse has gone smoothly over the last six months and it appears the company’s revenue cycle management issues have subsided.

Pediatrix continues to prune the portfolio of practices that are underperforming as well as the expected divestiture of the company’s primary and urgent care businesses.  The primary and urgent care businesses were not underperforming, however, the company has not been able to target enough acquisitions to scale this platform and believes its best to sell these assets.  These efforts will be completed in 2024 and represent ~$30mm of EBITDA, which will mainly affect 2025 results.     

EBITDA has declined from $265mm in 2021 to $200mm in 2023 due to cares act payments completely going away which add $16.5mm to EBITDA in 2021, the RCM outsourcing that went bad, and higher expenses due to elevated physician salaries and having to rehire employees as the company goes from a fully outsourced to a hybrid RCM platform. 

Overall, the company’s issues have been handled and the valuation assumes that the company’s revenues and margins will decline significantly further.  Pediatrix will earn over $100mm of free cash flow in 2024, stating on their most recent call that 70% conversion from EBITDA to CFO still holds.  Guidance is for slight revenue and EBITDA growth with EBITDA between $200 to $220mm, which on the low end would be $140mm of CFO, or FCF (my estimate) of $105mm to $110mm as capex has been running in the $30mm to $35mm range.  The company exited 2023 with $440mm of net debt and therefore, net debt should be ~$330mm at year end 2024 (theres always an increase of debt in the 1Q due to working capital).  The market capitalization is currently $608mm or EV of $938mm be year end with FCF of ~$105mm or ~9x free cash flow.  The company has interest expense of ~$40mm, which should go down as debt is paid off, therefore, unlevered FCF is $135mm.  This equates to ~7x EV/unlevered FCF for a business with high returns of tangible capital due to their use of the hospital facilities to run their business, an unlevered balance sheet, and continued divestitures which should maintain or boost margins, refocus the company, and add even more cash flow to the balance.           

Risks:

• Recession: If economic conditions in the United States deteriorate shifts toward Medicaid, lower pricing vs. commercial and patient volumes could decline. 
• Continued declining birth rates
• Medical malpractice and other lawsuits
• 30% of net revenue is in Texas

Catalyst

Share repurchases

Buyout

Margins stabilizing to expanding