Investors in Accretive Health
It's probably time to stumble off this roller coaster if you're still on board. Here are three reasons why:
1. Minnesota falls
Much of Accretive Health's volatility stems from its Minnesota woes. The state's attorney general accused the company in January of violating Minnesota debt collection laws and both federal and state health privacy laws.
In July, Accretive Health settled with Minnesota without admitting any liability – spurring a 37% gain in a single day. The company had to pay $2.5 million and shut down all operations in Minnesota. The initial market reaction indicated that investors thought the settlement would allow Accretive Health to move past the issues.
That doesn't seem to be happening yet. The stock gave back most of the gains from the settlement news. The state of Illinois filed a lawsuit similar to the original one in Minnesota.
The biggest potential issue, though, is that the negative publicity the company received could impact its chances for winning new business. Accretive Health admits that this is a possibility and stated that the unfavorably publicity could also lengthen its sales cycle with new customers.
2. Expenses rise
Despite an impressive 41% increase in revenue in the first six months of 2012 compared to 2011, earnings dropped sharply from the prior year. Why? Expenses went way up.
Costs of services rose from 76.6% of net revenue in the first six months of 2011 to 81.6% in 2012. That increase resulted in operating margins moving up by less than $9 million even though revenue jumped by more than $143 million.
Other operating expenses grew nearly 32%. Some of the increase is related to the Minnesota problems, which should only have a temporary impact. There is a longer-term factor, though. Accretive Health is spending more on management personnel at customer sites. These higher costs will likely continue to squeeze margins.
3. Scary heights
Even after its stock collapsed, Accretive Health still looks expensive with a forward price-to-earnings multiple of 22. Most competitors reflect less lofty valuations.
The only significant publicly traded competitor surpassing Accretive's forward P/E is athenahealth
With lingering uncertainty related to the Minnesota debacle, higher overhead costs, and a relatively high valuation, I doubt that the ride provided by Accretive Health will bring much immediate joy. The company could perform well over the long run, but investors should probably stay off this roller coaster for now.
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Fool contributor Keith Speights owns no shares in the stocks mentioned above. Motley Fool newsletter services have recommended buying shares of UnitedHealth Group and athenahealth. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.