I was planning to post a follow-on article on Accretive Health (AH) subsequent to one of their quarterly earnings reports or noteworthy corporate events. I first reported on this company back in September. Their business model and market position are very attractive as are their growth prospects. Although, I did not recommend buying the stock back then I did recommend putting the Company on your watch list. Ideally, continued strong sales & earnings and/or bullish corporate initiatives would generate strong enduring market support for the stock and present an attractive buying opportunity.
The Company delivered strong results in Q4. Earnings grew 89% versus the prior year's period and sales were up 53%. The growth story was alive and well at this point. So why wasn't the stock going up? The closing price on September 12, the date of my posting, was 23.65. Although, the price reached 29.10 on November 8, it steadily trended lower. A negative divergence like this is a huge red flag.
On March 29, the price cratered 17% on huge volume in response to the Company's announcement that it was giving up ~$65 million in revenue from a Minnesota hospital operator. They modified their contract with the customer in response to a lawsuit from the Minnesota Attorney General alleging the Company violated HIPAA by not keeping patient records confidential.
Accretive found itself in the AG's crosshairs as a result a stolen laptop that an Accretive employee left in a rental car while parked in a bar/restaurant area of Minneapolis called Seven Corners. The laptop contained the unencrypted health records of 23,531 Minnesota patients (I hope for the employee's sake that he/she was hungry and not thirsty).
The lawsuit also charges Accretive with violating MN state debt collection statutes and consumer protection laws. These charges stem from a complaint filed by a patient who took exception to Accretive's allegedly rude treatment when the Company pursued an outstanding hospital bill.
The stock currently resides close to its post-run up low of 19.31 that occurred on October 4. Goldman Sachs downgraded the stock to Market Perform on April 3.
So what do we make of all this? The MN AG lawsuit will most certainly be settled before trial. It is best to pay a fine and move on from this kind of embarrassing incident. Accretive will have to refine its debt collection and data management procedures and policies. I am quite sure that this effort is already underway.
As an isolated incident, this shouldn't have a material impact on Accretive's overall business. The $65 million hit represents ~6% of FY12 forecasted revenues of $1.1 billion. Assuming a 4% earnings yield, this would shave ~.02 off the consensus earnings of .61/share. This still represents an increase of 34% over FY11. The revised revenues of $1.035 billion represent an increase of 25% versus the prior year. It's a bump in the road.
The greater concern with this stock is the medium term negative price divergence versus the fundamentals. For the past 5 quarters, Accretive has averaged earnings growth of 74% and revenue growth of 33%. Here is a company that is consistently delivering attractive growth stock results but the price keeps going down.
There are 10 analysts covering the stock. Over the past 90 days, the consensus 2012 EPS estimate has fallen from .70 to .61. The consensus estimate for 2013 has dropped from .97 to .89. Although, the projected NI growth for each year is still healthy (39% and 46%, respectively) the downward revisions are not.
In February, Accretive issued earnings guidance of .61 - .65/share on revenues of $1.1 billion. They intend to update their guidance on May 9. The downward revisions by the analysts seem to imply more downward pressure on margins than what is attributable to the Minnesota situation.
Accretive equity holders should be a bit nervous about May 9.