Mulling Over Mednax (MD)

Mednax (MD) is a national medical practice that provides specialty and sub-specialty care in two areas: neonatal-pediatric and anesthesia.

MD operates in 33 states and Puerto Rico, and its network of doctors includes 1625 physicians, 925 of which are neonatal specialists.

Company Background:

 – Mednax is organized into two units: Pediatrix Medical Group and American Anesthesiology, according to a November 2010 Investor Presentation available at the company’s website.

** The Pediatrix Group consists of over 1325 physicians and 575 nurse practitioners who staff 275 NICUs (Neonatal Intensive Care Units).  Medical specialties include neonatal, maternal fetal, pediatric cardiology, and pediatric critical care.

** American Anesthesiology, begun in 2007, has over 300 physicians and 350 nurse anesthetists serving 22 hospitals and 38 surgery and pain management centers.

– The Pediatrix Group has made more than 150 acquisitions in the last 15 years with eight in 2010.

– American Anesthesiology has made six acquisitions since 2007 with two in 2010.

– Mednax’s latest 10K report stated that it had acquired 11 group practices in 2009 for $145.5M, seven of which were neonatal groups.  In 2008, MD acquired 13 groups for $260.9M.

 ** In 2007-2009, 56% of patient revenues were generated in 5 states with Texas accounting for 26% on average during those three years.  

– Value Line reported that MD’s cash flow in the 3^rd Q of 2010 remained strong and allowed it to acquire one pediatric group practice in Texas and two anesthesia practices in North Carolina.

 ** VL thought anesthesia would be the company’s primary growth engine as there are 47,000 practicing anesthesiologists in the U.S. while only 300 work for MD.

** VL expects that this year’s spending on acquisitions (around $300M) will be maintained annually for the foreseeable future.

– Mednax’s historic Sales & EPS growth have been robust, based on Morningstar data via BI, with no disturbing dips or downturns: 18.1 & 25.5% growth last ten years; 16.2 & 17.7% last five; and 18.5 & 16.8% last three years.

SSG Discussion:

– I compared the recent  SSG by CarolT, available from BI’s First Cut page, with mine, Take Stock, and the Investment Advisory Service (which was attached to Carol’s SSG).  IAS is a well-respected pay service that uses the SSG.

– After the following comparison table, I discuss several key SSG issues and dig a little deeper into MD’s down trending Pre-Tax Profit Margin and its Financial Condition.

MEDNAX             (MD)	CarolT	Armin	Take Stock	Investment Advisory       Service
Date	2/4/11	2/9/11	2/8/11	1/14/11
Data	Mstar via BI	Same	Mstar via SC	Mstar via BI
Share Price	$61.23	$62.58	$65.00	$68.11
52 week High & Low Price	$70.17 & $44.83	Same &      Same	Not Used	$70.14 &   Same
Last Quarter of Reported Data	Q3 ending 9/30/10	Same	Same	Same
Project Future Growth From	Last FY	Last Q	Last FY	Last Q
Software Used	TK 6	Same	SC Online	TK 6
Est Sales Growth	10.00%	Same	15.50%	14.00%
Est EPS Growth	10.00%	Same	13.30%	14.00%
Forecast High PE	20.0	18.1                     (from Alt-M)	18.1	22.0
Forecast Hi EPS	$6.09	$6.78	$7.06	$8.11
Forecast Hi Price	$121.80           (16% > VL)	$122.70	$127.82	$178.40           (70% > VL)
Value Line Estimated High Price = $70–105 as of 12/17/10
Forecast Low PE	10.0	6.5                        (from Alt-M)	7.6	12.0
Forecast Lo EPS	$4.21                 (ttm)	Same	$4.15	$3.78          (last FY)
Forecast Lo Price	$42.10	$32.00	$31.54	$45.40
Upside/Down	3.2	2.0	2.0 (imputed)	4.6
Total Return	14.7%	14.4%	15.2%	20.9%
Buy Under	Not Used	$54.68	$55.74	Not Used
Quality	Not Used	Not Used	TS = 6.3	Not Used
RV/PRV	97.3/88.7(2005 &           2007 out)	100.0/90.7 (Same)	Not Used	Not Used
RV/PRV                  (no outs)	Not Used	86.6/78.6	Not Used	95.3/95.4          (TK 6 error)
PTPM – 5 yr ave	23.1%              Trend down	Same                  Same	Same                   Trend NA	Same                Trend down
ROE – 5 yr ave Ending Equity	14.3%               Trend up	Same                 Same	Not Used	Not Used
ROE – 5 yr ave Beginning Equity	Not Used	16.4%                   Trend up	Same                Trend NA	Same       Trend up
Debt to Equity	3.8%               Trend up	Same                 Same	Not Used	3.8%                Trend up

Estimating MD’s Future EPS Growth for the Next 5 Years:

Carol’s SSG:

– Carol wrote that she projected 10.00% EPS growth by plotting 2011 and 2012 estimates from YahooFinance and Value Line’s 3-5 year estimate.

** She ignored the YahooFinance’s 5 year EPS estimate of 14.50% which seems bizarre since that is much more relevant to our SSGs than short-term estimates for this year and next year. 

** Moreover, by not checking other long-term EPS estimates, she did not realize that VL’s estimate was the lowest nor did she learn what was high.

Armin’s SSG:

– When I did my SSG, the 7 long-term EPS estimates I ALWAYS check averaged 13.40% and ranged from 10.50 % low (Value Line) to 15.00% high (Zacks via BI);

** Morningstar.com via FactSet was 13.20%, CNNMoney via FactSet CallStreet was 13.50%, Zacks.com and Reuters.com were both 13.79%, and YahooFinance via Thomson Reuters was 14.50%.

** I chose 10.00%, the very lowest estimate by one of the 7 analysts at Reuters.com who ranged from 17.50% high to 10.00% low.

** For how I estimate EPS for all my SSGs, see: Estimating EPS  [click here].

Projection Point for Future Growth:

– Every SSG except Take Stock has the option of projecting future growth from the end of: the last Quarter, the last Fiscal Year, or from the Historical Trend Line.

– Carol chose to project growth from the end of the last FY.  Using the same identical judgments she used and changing only the projection point, her SSG would have improved significantly:

• High EPS would increase from $6.09 to $6.78
• High Price would go from $121.80 to $135.60
• Total Return would increase from 14.7% to 16.7%

– Take Stock always projects growth from the end of the last FY as part of its ultra-conservative design.

Estimating the Forecast High PE for the Next 5 Years:

– Carol eliminated 2005 and 2007 as outliers and used the resulting average (20.0) as her Forecast High PE.

– I used Toolkit’s Alt-M option which eliminates the five highest PEs in the last 10 years and averages the rest (18.1). 

** Alt-M is usually the most conservative option and I tend to use it when trends are not obvious and/or I know next-to-nothing about the company.

Final Results:

– Carol started with a 10% estimate for future EPS growth, and got a Forecast High Price of $121.80, a 3.2 Upside/Downside Ratio, and a 14.7% Total Return.

– I also used a 10.00% EPS estimate (for different reasons), and got nearly the same Forecast High Price ($122.70) and TR (14.45%), but only a 2.0 U/D.

** The main reason for our difference was that Carol decided to use 20.0 & 10.0 for her Forecast High & Low PEs while I used 18.1 & 6.5 from Alt-M.

– IAS started with a 14% EPS estimate (not explained), and got a $178.40 Forecast High Price, a 4.6 U/D, and a 20.9% TR.

** IAS’s $178.40 High Price was a whopping 70% greater than the high end of VL’s $70-105 estimated High Price which seems unreasonable and unbelievable to me. See: Determining What’s Reasonable and What’s Not: An Update [click here].

Pre-Tax Profit Margin (PTPM) & Return on Equity (ROE):

– Carol considered MD to be a marginal BUY and was concerned about its downtrend in Pre-Tax Profit Margin which can be a red-flag warning sign.  She would postpone buying the stock until she learned more about its PTPM.

** Carol did, however, identify TMH as a direct competitor that had a much lower Profit Margin, but that was not sufficient to satisfy her.

– Morningstar via BI placed MD in the Medical Care Industry which, according to the Stock Central website, has a total of 55 companies:

** MD’s PTPM was much, much better than its industry average and ranked 2^nd (23.1% vs 9.7%) while TMH ranked 24^th with a PTPM of 5.6%.

** I am not bothered by MD’s downtrend and conclude that it represents an unsustainable high level rather than a red-flag warning flag.

– Even though MD’s Return on Equity is trending up, which is always a good sign, I still want to know if it was better or worse than its industry average:

** MD’s ROE was substantially worse than its industry average and ranked 14^th out of 55 companies (14.3% vs 23.5%); by comparison, TMH was terrible and ranked 49^th (-55.4%).

Financial Condition:

 – Value Line rated MD a B++ for Financial Strength and reported that it had $75.6M in cash (up from $31.9M in 2009) and only $0.2M in debt.

– There was no Morningstar analyst report.

– The one-click Annual Report spreadsheet by Bob Adams gave the company 56 out of 100 with 4 Bullish results (good things) and 11 Bearish (not-so-goods):

** The 11 Bearish results included: ROE is inadequate and Long-Term Debt is increasing, and both got a yellow, caution flag; cost of sales is increasing faster than sales.

** The 4 Bullish results included: Debt to Equity and Interest Coverage are both very good, and got a green flag.

### You can get a copy of this free, easy-to-use spreadsheet and a description of its many nifty features by going to my Favorite Links page [click here] .

 – My SSG data showed that MD’s Debt to Equity was 4.3% in 2009, down from 14.3% in 2008, and that Cash Flow/Share has been steadily increasing for the last 5 years, from $3.23 in 2005 to $4.87 in 2009.

 

Armin