Paul of Tarsus had it right: Sooner or later, you've got to put away childish things.
Now, there's absolutely nothing wrong with Pediatrix's (NYSE: PDX ) neonatal practice management business. In fact, you could say that success is part of the problem -- it's done so well that it will likely have to find a new market to continue growing at the pace to which investors have become accustomed.
That's not to say that the company doesn't have a few more good quarters to put in the books. Revenue in December rose 10%, as same-unit revenue increased 3.5% atop a 1.7% rise in patient volumes. Margins also continued to improve; the company reported that adjusted operating income rose 25%, while earnings per share, also on an adjusted basis, were up 18%.
Management also announced a proposed settlement with the government that would resolve a long-standing investigation of billing practices with a $25 million payment. While this payment does wrap up one outstanding issue, it doesn't address some investors' bigger question: Can the company continue to grow? There's still the opportunity for states to mandate more tests (standards currently range from 4 to 40), but relying upon state governments to boost your growth is hardly a sound strategy.
Instead, I would expect the company to begin duplicating its successful model in new areas of physician practice. Both analysts and the company have discussed anesthesiology as one potential target, and while it's a big leap from neonatal care, I'm inclined to give this company the benefit of the doubt. After all, it's one of the few physician practice management companies that has managed to survive, let alone thrive.
Good luck finding comparable companies. American DentalPartners (Nasdaq: ADPI ) , PainCare (NYSE: PRZ ) , and VCA Antech (Nasdaq: WOOF ) share some similarities but are more different than alike in my view. Same goes for other successful (but quite different) health-care companies like AmSurg (Nasdaq: AMSG ) or PsychiatricSolutions (Nasdaq: PSYS ) .
In valuing Pediatrix, you have to decide whether to include some, all, or any of its spending on acquisitions as part of its capex requirements, since ongoing acquisitions are undoubtedly a key aspect of future growth. By my methodology, Pediatrix is still a strong player, but the stock isn't quite as appealing as it was 10% or 20% ago.
For more Foolish thoughts on health care:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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