What happened

Despite reporting 9.2% year-over-year sales growth, a sharp decline in profitability sent shares in Mednax (NYSE:MD) lower Friday. Shares were down 11.9% at noon EDT.

So what

Mednax is a large provider of neonatal and anesthesia services to medical facilities. In the past, it has relied heavily on acquiring physician practices to fuel growth; however, in the second quarter, acquisitions failed to offset headwinds due to rising costs and a drop-off in organic admissions. 

A businessman watches a red arrow crash down through the floor.


Overall, Mednax's sales increased 9.2% to $842.9 million. Acquisitions accounted for 10.1% of revenue, however, and were offset by a 0.9% decline in revenue in its organic business. That dropoff was due to its patient mix tilting more toward government payers -- from which payments are lower -- and fewer admissions.

On the bottom line, Mednax's results were crimped by costs associated with its acquisitions, as well as wage growth for its physicians and other employees. The company's net income in the second quarter was $63.7 million, or $0.69 per share, down from $82.4 million, or $0.89 per diluted share, in Q2 2016.

Now what

The company's guidance for the third quarter isn't much better. Management forecasts that comparable sales will be flat to down 2% versus last year, and that EPS will be between $0.66 to $0.71. After adjusting for one-time expenses, EPS is expected to be between $0.83 to $0.88. For perspective, in Q3 2016, Mednax reported unadjusted and adjusted EPS of $1.04 and $1.09, respectively. 

Acquisitions will continue to support this company; however, until same-store revenue ticks higher and costs flatten out as a percentage of revenue, it's probably best to take a wait-and-see approach to Mednax stock. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.