Friday, September 3, 1999
Pediatrix Medical Group, Inc.
Price (9/2/99): $13 15/16
HOW DID IT FIND TROUBLE?
Pediatrix is one stock that has made adult shareholders cry like babies. After starting the year just shy of $60 per share, Pediatrix has had a rough 1999 that has been marked by an audit of its financial statements, class action lawsuits, regulatory investigations, and most of all, investor worry.
The largest drop in the stock actually hit back in February. On February 10 the company announced that it would likely beat its fourth quarter profit estimates. In the same press release Pediatrix made it known that it was forced to switch auditors since one of the employees of its old audit firm actually owned stock in Pediatrix. That's a no-no for independent auditors.
Then on February 12 it was announced that its estimate-beating announcement of two days prior should probably be ignored since the company's new auditors had some questions about Pediatrix's accounting of certain receivables and acquisition-related expenses. That trading day the stock went from $56 5/8 all the way down to $28. As with most companies that have accounting-related difficulties that harm their stock prices, the class action lawyers were fast to take action against Pediatrix.
A few weeks later on February 22 Pediatrix announced that it was rescinding its previously announced 2-for-1 stock split. After all, there was no need to split since the stock had already been chopped in half by the market.
April 5 was also a big day since the company announced that regulators in Arizona, Colorado, and Florida were requesting documents related to Pediatrix's billing practices. On the good side, the company also said that its auditors found the reported 1998 financials fairly stated. However, the company changed the way it accounts for its acquisitions, and there were sizable expenses related to the change in auditors.
The accounting problems may have abated for the moment, but the related class action lawsuits remain an open issue. Also open are the regulatory investigations, and worry about any adverse outcome from those investigations has recently pushed this former highflyer to new lows.
Based in Fort Lauderdale, Florida, Pediatrix Medical Group is the country's largest provider of maternal and newborn physician services. The company manages on a contract-basis a series of neonatal intensive care units (NICUs) as well as pediatric intensive care units (PICUs) based in hospitals. The firm manages the doctors and staff and also handles the billing and reimbursement for the units. At last count, the firm had roughly 140 NICUs and 325 neonatologists under management in 25 states and Puerto Rico.
Pediatrix also has a subsidiary, Obstetrix Medical Group, that specializes in perinatal care. Where neonatologists generally treat premature and critically ill newborns, perinatologists largely treat pregnant mothers with complications related to their pregnancies. The company has roughly 50 perinatologists under management in 6 states.
Pediatrix has grown to its current size via numerous acquisitions over the past few years. During 1998, Pediatrix closed on 15 acquisitions, adding 18 NICUs and 7 perinatal practices to its portfolio. During the first six months of the year, the company completed 8 acquisitions of physician groups. The company also markets its services to doctors and hospitals, and these marketing activities added 8 NICUs to its roster last year.
Pediatrix is a member of the S&P 600 SmallCap index.
12-month sales: $212.4 million
12-month income: $30.9 million
Profit Margin: 14.5%
Market Cap: $219.7 million
Cash: $0.6 million
Current Assets: $77.1 million
Current Liabilities: $48.2 million
Long-term Debt: $44.1 million
HOW COULD YOU HAVE SEEN IT COMING?
It's probably safe to say that seeing the trouble related to the company's auditors back in February would have been nearly impossible to see ahead of time. It's certainly one of the stranger and rarer types of accounting difficulties that a company can possibly have.
On the regulatory front, only a handful of folks knew about the billing investigation before it was formally announced. There is a wealth of information at investors' fingertips concerning any public company, but sadly there is just no way the average investor can get a grasp ahead of time when such operational or accounting difficulties pop up. This is why it is important to invest in companies with proven track records and executives you can trust.
Nevertheless, some short-sellers had been screaming about the way Pediatrix was capitalizing instead of expensing some of its acquisitions. It appears that those screams were warranted since the company has changed its accounting policy on that front.
WHERE TO FROM HERE?
As the saying goes, there has been lots of smoke but no fire with Pediatrix. Yet. The change of auditors and the inquiries of the new auditors were smoke coming from the financial statements, but there ended up being only a few burning embers there related to its acquisition accounting, not the full-fledged conflagration some feared would have the company's earnings from previous years wiped out. However, there's still some smoke here since the class action crowd is pushing ahead with their lawsuits.
Another issue is that of the investigations into the firm's billing practices. No definitive action has been taken against the company thus far, and some believers in the company claim that investigations into the billing practices of doctors are a fairly common occurrence. Time will tell if this investigation uncovers a mountain or a molehill.
On a fundamental basis, Pediatrix does look fairly intriguing. The company has successfully been able to "roll up" and dominate its niche. Pediatrix offers its doctors and hospitals numerous operational advantages, which is one of the reasons the company has been able to add physicians and clinics to its portfolio at such a torrid pace. Plus, investors interested in growth stocks have to love how the company has been able to grow its profits.
Another positive factor to consider is that two different insiders, including the company's President and CFO, have recently been buying the stock. There are numerous reasons why insiders may sell, but there's generally only one reason why they buy.
Although the future may still be fairly hazy, interested investors should certainly research Pediatrix further since the company does have some fairly vibrant earnings growth expected and is trading on the cheap at roughly book value, 7x trailing earnings, and close to 5x forward profit estimates. However, it's probably best to wait until the smoke clears to get a clearer picture of what is actually going on.
-- By Paul Larson
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