Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Summary

  • Adeptus Health went public last week in what has been a very successful public offering.
  • Investors like the rapid growth and continued good growth prospects.
  • Yet the rapid growth and lack of earnings are a few concerns of mine.

Adeptus Health (NYSE:ADPT) is the operator of First Choice Emergency Remorse, the largest network of independent freestanding emergency rooms in the US.

The company has seen a successful public debut over the past week as investors like the great growth prospects. I am a cautious after the company fails to report a profit on the rapid growth.

The Public Offering

Adeptus Health currently operates 32 emergency room facilities in Texas and Colorado. The company is growing rapidly. In 2012 it operated just 14 facilities while it aims to operate 53 facilities by the end of this year.

The company has been founded back in 2002 aiming to provide quality emergency care in a cost-effective manner. With the current emergency system being overburdened the company anticipates to serve an attractive growth market.

Increased visits to emergency rooms and the outcomes of the Affordable Care Act all drive demand for emergency rooms while the number of facilities offering this kind of care has actually gone down.

Adeptus sold 4.9 million shares for $22 apiece, thereby raising $108 million in gross proceeds. Note that all proceeds will benefit the company with no shares being offered by selling shareholders. Demand for the offering was solid, with shares being priced at the high end of the preliminary offering range of $19-$22 per share. At that levels equity in the business was valued at roughly $450 million.

Banks which aided the company it the offering were Deutsche Bank, Goldman Sachs, Evercore, Morgan Stanley, Piper Jaffray, RBC Capital Markets and Dougherty & Company.

Valuation

In essence, Adeptus operates emergency care centers which are open 24/7 and are located in convenient locations. The company employs experienced and board-certified physicians in an efficiently organized business. Key other amenities include the full radiology suite and on-site laboratories.

Within the emergency care segment, there are about 4,500 hospital emergency rooms while there are just 400 freestanding emergency rooms in what is seen as a huge growth opportunity by the company.

Thanks to the huge growth in the number of facilities being operated, the company has witnessed very rapid growth. Adeptus operated 14 facilities in 2012, after which it opened another 12 facilities in 2003. For this year the total hospital count is set to more than double after planning to open 27 facilities.

For the year of 2013, Adeptus posted net patient revenues of $102.9 million, which is up 41.7% on the year before. This implies that average revenues per facility came in at roughly $4.0 million per annum. Despite the rapid growth, operating earnings were under severe pressure falling from $5.3 million to just $0.9 million.

Increased interest payments resulted in a $3.0 million loss which compares to a $3.2 million profit posted in the year before.

Growth continued at the start of 2014 with first quarter revenues advancing by 84.3% to $38.8 million. A concerning trend are the increased provisions for bad debt which have risen to 12.9% of gross sales for the quarter. Operating losses for the first quarter narrowed slightly from $0.4 million to $0.3 million while net losses rose on the back of sharply higher interest expenses of $2.2 million.

Adeptus held merely $1.1 million in cash before the offering took place while operating with $86.4 million in debt. Adding back the gross proceeds from the offering and the company will operate with a roughly flat net cash position. Note that all of the proceeds from the offering will be used to purchase newly issued securities in a reorganization transaction.

At $25.30 per share, equity in Adeptus is valued around $525 million. This values the company at 5.1 times last year's annual revenues which is a bit of a non-meaningful valuation metric given the rapid pace of growth currently.

Investment Thesis

As noted above, the offering of Adeptus has been a big success. Shares were offered at the high end of the preliminary range, some 7.3% above the midpoint of the pricing range. At current levels of $25.30 per share, shares are trading 23.4% above the midpoint of that range.

Given the spectacular growth, Adeptus should be generating net revenues at a rate of over $200 million by the end of this year. Despite the massive growth, the company is still breaking even on an operating basis, as increased interest payments put pressure on the bottom line. The potential for emergency room growth outside of the traditional hospitals is big, with Thomas Hall Adeptus' CEO seeing potential of 5,000 to 10,000 free standing emergency rooms in the US.

Besides the modest losses, other trends or potential things could result in risks to shareholders. This includes changes in legislation, a further increase in bad debt provisions, reputation damage as well as complications related to this fast growth.

As such I am weighing both the pros and cons about this offering. Pros obviously include anticipated company and industry growth, while the lack of earnings and quick growth also result in operational risks.

I plan to avoid the shares amidst the current momentum and remain on the sidelines. I will keep the company on my radar, keeping an eye on potential profitable growth in the future.

Source: Adeptus Health - Successful Offering Of This Rapidly Growing Emergency Room Operator