CYH reported adjusted EBITDA of $564M, ~2% below the midpoint of implied Q4 guidance but above WR/Consensus estimates of $487M/$530M. The beat should be well received since given a string of weak results that started in 3Q15. Cash revs were 2% above WR/Consensus with the majority of the upside driven by stronger margins.
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Wolfe Research Senior Healthcare Services Analyst, Justin Lake, hosted a webinar discussing his analysis of the UNH Lawsuit on MCOs.
This morning, 2/17/17, LPNT reported Q4 adjusted EBITDA of $196.8M vs. WR/Consensus of $197.3M/$200.4M. Cash revs were 0.8% above our estimate, with margins 10bps lower. Same store adjusted admissions decreased by 0.7%, an improvement vs. -1.8%/-1.9% in Q2/Q3 but against an easier comp (-1.1% in 4Q16). LPNT issued 2017 adjusted EBITDA guidance of $785M-$815M, bracketing consensus of $800M but below our $814M (our model has M&A). Net rev guidance of $6.5-$6.6B is 3% below consensus of $6.7B, with implied EBITDA margins of 12.2% in line with our est but 25bps above consensus. Guidance assumes same store adjusted admissions grow 0.5-1.0% vs. -0.9% in 2016 (recall initial 2016 guidance was 1.5-2.5%) and same store rev per AA of 1.5-2.5% vs. 2.9% in 2016 (initial guidance of 1.5-2.5%).
Adjusted operating income of $445 million (down 6% y/y) was 4% below our $462 million estimate and also below consensus of $451 million. Kidney Care OI was $5M or 1% below our est, while DMG OI was $12M below our estimate. The EPS beat was driven by lower share count and a favorable tax rate. DVA introduced full 2017 guidance that reiterated the Kidney Care and DMG guidance previously issued. Our OI estimates are unchanged - recall that we have already factored in the $100M headwind in 2018 from the 401k change and pulled in some EPO savings into 2017 (we assume 25% of $160m in savings ratably from 2017-2020). Note that our estimates also assume below avg. growth in Kidney Care OI (~3.5%) from demographically driven commercial payer mix deterioration as laid out in our initiation report. We increase our PT to $70 from $67 to reflect higher #s illustrated below, driven by lower share-count post significant repo in Q4’16 and expectation of another $1B of repo in 2017 driven by significant cash on hand ending the year.
This morning (2/15/17) HHS issued the PPACA Market Stabilization regulation introducing changes to the individual and small group ACA-compliant markets with the goal of stabilizing/improving the risk pool and ensuring access to affordable coverage. The regulation is available here. The details appear generally consistent with the reporting coming out of D.C. over the past a couple weeks as the reg was finalized and sent to OMB. As expected the reg proposes to tighten the use of special enrollment periods and expand pre-verification of eligibility, address potential gaming of premium payments, modest changes to actuarial value requirements and shortening the open enrollment period to 6 weeks for the 2018 coverage year. One potential change that does not appear in the reg is expanding the maximum age pricing bands to 3.49:1 from 3:1. These are positive steps to address a number of the issues we discussed in our previous work on the Individual market but we doubt it changes whether plans will exit or not. We also remain concerned about off exchange membership given this is the area which was likely to be most impacted by increased rates given lack of subsidies.
Yesterday (2/14/17) after the market closed HUM issued 2017 financial guidance and held its first conference call since the AET deal was announced in July 2015. HUM guided adjusted EPS to $10.80-$11.00 vs. WR/Consensus of $11.15/$10.83. As expected there were a number of puts and takes in the numbers but overall we view the guidance as a solid jump-off point to 2017. Combined with management doing a solid job of articulating the current state of HUM’s core business we think the stage is now set for focus to shift to the company’s strong “reasonable” core earnings power with potential stand-alone upside fueled by another year of strong growth in 2018 coupled with potential upside (see our report on earnings scenarios here) on 1) Capital deployment 2) Republican-driven policy reform and 3) Potential M&A. With termination announcements for both HC mega-mergers, HUM’s Med Adv business remains the most strategic asset in the MCO space and we expect the stock to continue reflecting multiple areas of shareholder optionality going forward.
Earlier this afternoon (2/14/17) CI announced it has exercised its right to terminate the proposed merger with ANTM following the court ruling in favor of the DOJ that enjoined the transaction. CI filed suit against ANTM to receive the $1.85B break-up fee as well as >$13B of additional damages that include the premium that CI shareholders didn’t realize as a result of the failed merger progress and ANTM’s “willful breaches of the merger agreement”. In the release CI says it is disappointed by the court’s decision to rule against the deal and that the company fulfilled all of its contractual obligations and fully cooperated with ANTM throughout the appeal process, noting that ANTM assumes responsibility for leading the regulatory approval process and litigation strategy – with key misstep according to CI being Anthem’s decision to follow “unilateral strategy that heavily favored the BCBS Association over the transaction” rather than the “agreed-upon plan”….”to create a combined company that would expand choice, improve affordability and quality, and further accelerated value-based care”. We are not sure what CI is referring to in terms of BCBS Association strategy but note ANTM responded with statement saying it continues to believe that CI doesn’t have the right to terminate the merger agreement at this time and remains comminuted to closing the transaction.
Improving risk/reward on psych turn and greater visibility on 2017 earnings. UHS has underperformed its peers significantly on the heels of concerns around the company’s psych business operations, both from a fundamental (labor/utilization) and regulatory (investigations/Buzzfeed) perspective. While we do not expect this uncertainty to dissipate immediately, we do see a path forward for the business and the stock starting with 4Q’16 results (more below). When coupled with a valuation that is at relative lows to both the S&P 500 and HCA and an absolute multiple of 7.3x/7.3x Wolfe/consensus 2018 EV/EBITDA-MI, there is clearly significant potential for a reflating valuation should UHS execute on psych turn and we see expectations as sufficiently low that buying the stock ahead of Q4’16 results to be reported on 2/28 makes sense. Our PT of $142 (20% upside) on slightly higher 2018 EBITDA and higher target multiple reflecting improving growth and investigatory outlook expected going forward.
Deal terminated, HUM to receive breakup fee, HUM hosting call at 4: 45PM – This morning (2/14/2017) AET and HUM announced that they have terminated their merger. AET will pay the $1B breakup fee to HUM, which is worth $630M after tax. HUM will put out a press release at 4:15PM today with 2017 financial guidance and host a conference call at 4:45PM. The announcement is not at all surprising following the court ruling in favor of the DOJ and the difficult path forward that an appeal would entail- we left recent meetings with AET management thinking that an appeal or settlement with the DOJ was highly unlikely. Ahead of HUM’s guidance release we recently laid out our detailed thoughts on HUM’s earnings trajectory across a number of scenarios and how to think about valuation in light of potential upside from continued progress towards earnings power, HIF repeal, leverage and M&A- please see our slides.
Wolfe Research Senior Healthcare Services Analyst, Justin Lake, hosted a webinar discussing his view of Humana's earnings power under several scenarios. This detailed look at 2017/2018 estimates included thoughts on valuation in light of potential upside drivers.
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