Editor's note: The previous version of this article incorrectly identified Pediatrix as a maker of newborn-care products. The mistake was made in the editing of the article. It has been corrected, and we apologize for the error.
Pediatrix (NYSE:PDX), a provider of neonatal care services, continued to get the job done in the third quarter. Revenue rose about 13% on the back of same-unit revenue growth of 4.9% (of which neonatal intensive care unit volume growth was a big contributor). Though that's a bit of a sequential slowdown, I wouldn't think it's the start of a worrisome trend.
Margin performance depends upon whether you want to give the company a pass on equity compensation expenses. If you exclude the expense, operating profit rose 19% and margins expanded nicely. But if you include the expense, profits rose 8% and the margin contracted. Considering that the company continued to see higher Medicaid reimbursements as a percentage of its patient load, that adjusted margin performance seems pretty solid to me. On the bottom line, adjusted earnings per share increased 24% (11.5% unadjusted).
Pediatrix kept up its acquisitive ways this quarter by buying three practices for about $20 million. That brings the total to 13 for about $86 million on a year-to-date basis. While I have decried growth-by-pocketbook in the past, I'd suggest that Pediatrix is one of the exceptions. First, the company routinely pays cash for its deals, limiting the dilution to shareholders and thus enforcing price discipline. Second, this is an exceptionally fragmented market, and there is legitimate growth potential in behaving as a consolidating force.
There really isn't another public company in the neonatal care market doing what Pediatrix does. That means investors interested in relative valuations have to turn to companies like Psychiatric Solutions (NASDAQ:PSYS) or Horizon Health Corp. (NASDAQ:HORC) in mental health care, United Surgical Partners (NASDAQ:USPI) and Amsurg (NASDAQ:AMSG) in outpatient surgery centers, or perhaps even VCA Antech (NASDAQ:WOOF) in veterinary care.
By those standards, Pediatrix shares don't look too expensive. Couple that with the earnings-based and cash flow-based valuation models that I use, and it appears that the stock still has room to go. Investors should note, though, that there are reimbursement and litigation risks here. As such, a little extra due diligence is a good idea.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
