What a brutal six months it’s been for Surgery Partners. The stock has dropped 42.4% and now trades at $12.18, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Surgery Partners, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Surgery Partners Not Exciting?
Despite the more favorable entry price, we don't have much confidence in Surgery Partners. Here are three reasons there are better opportunities than SGRY and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Outpatient & Specialty Care company because there’s a ceiling to what customers will pay.
Over the last two years, Surgery Partners’s units sold averaged 3.6% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Surgery Partners’s revenue to rise by 2.9%, a deceleration versus its 12.2% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will face some demand challenges.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Surgery Partners’s $3.78 billion of debt exceeds the $239.9 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $526.2 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Surgery Partners could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Surgery Partners can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Surgery Partners isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 61.9× forward P/E (or $12.18 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
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