What happened

Shares of Mednax (NYSE:MD) were up 12.7% at 3:30 p.m. EST Thursday after Paul Singer's Elliott Management revealed a 7% stake in the company and agreed to speak to management about ways to boost shareholder value.

So what

Mednax is a large provider of neonatal and anesthesia services to medical facilities. The company's seen significant revenue growth over the past five years because of acquisitions, however, profit growth has slowed because of rising costs.

A person points at a tablet displaying an ascending bar chart.

Image source: Getty Images.

In Q3, the company's revenue was $869 million, up 4.9% year over year, and its earnings per share were $0.87, down from $1.09 last year. Both figures were above industry watcher forecasts, but 4.2% of the sales growth came from acquisitions, and profit growth was held back by an increase in physician pay. As a percentage of revenue, practice salaries and benefits expense increased to 67.5% in the quarter from 63% in the same period one year ago.

Now what

Elliott Management is a $34 billion hedge fund with a penchant for activist investing, so it shouldn't be a surprise if we hear more from them in the coming months about changes they think Mednax ought to make to its business. Selling itself will likely be on the table, but investors are better off ignoring merger and acquisition rumors. Historically, it's made more sense to focus on the business as the reason behind buying shares, not the possibility of an acquisition.

Undeniably, there's growing demand in the U.S. for Mednax's services. A larger, longer-living population provides important tailwinds to long-term growth. However, until the company can get a better hold onto its expenses, it's probably best to look at other investment ideas where profit margin is expanding, not falling.

 

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.