Medical Facilities is a great post-COVID play, this investor says

There are a number of ways to play the post-pandemic re-opening of the economy but one facet you may not have considered is elective surgery, where a huge backlog has accumulated over months of delayed or cancelled procedures. And portfolio manager Ross Healy says this phenomenon will work in favour of US surgical facilities company Medical Facilities Corp (Medical Facilities Stock Quote, Charts, News, Analysts, Financials TSX:DR).

Medical Facilities’ focus is on specialty hospitals and ambulatory surgery centres in the United States where they offer non-emergency surgical, imaging, diagnostic and pain management procedures along with urgent care and occupational health services. 

The company has controlling interest in four specialty surgical hospitals in Arkansas, Oklahoma and South Dakota and an ambulatory surgery centre in California, along with controlling interest, through a partnership with NueHealth LLC, in five ambulatory surgery centres in Michigan, Missouri, Nebraska, Ohio and Pennsylvania.

Unsurprisingly, Medical Facilities’ business was hit in the early days of the pandemic, as lockdowns forced cancellations of procedures across its hospitals and centres. And after a rough second first and second quarter 2020, MFC picked it up in the second half of the year but business was still overall lower than pre-COVID times.

“We saw a dramatic rebound in case volumes in the back half of the year. However, they did not reach prior year levels,” said Medical Facilities CFO David Watson in the fourth quarter 2020 conference call.

“On a same-store basis, total surgical cases were down 7.1 per cent, outpatient cases were down 8.8 per cent, and inpatient cases declined 9.2 per cent from the fourth quarter 2019. Observation cases on the other hand, increased by 26.8 per cent. In the fourth quarter, we had total revenue and other income of $109.5 million, which included $2.4 million of government stimulus income. This is 3.9 per cent lower than the same period last year,” he said.

For the full 2020 year, MFC saw total revenue drop just two per cent, however, to $389.9 million, which included $26.0 million in government stimulus income, while adjusted EBITDA dropped a fraction at 0.2 per cent to $96.1 million. (All figures in US dollars except where noted otherwise.)

“Following the dramatic rebound in the third quarter, our case volumes continued to normalize in the fourth quarter despite the surge of COVID-19 across the United States,” said Robert O. Horrar, President and CEO, in a fourth quarter press release. 

“We are thankful to our physician partners and all the healthcare associates who ensure that our facilities continue to provide a safe environment and deliver excellent care to patients. We are optimistic on our outlook for 2021 as vaccinations are rolling out across the country. Finally, our balance sheet remains strong, and we are well positioned to capitalize on market opportunities as the recovery continues,” Horrar said.

Jump ahead to earlier this month when MFC released its second quarter 2021 numbers and the company’s total revenue was up 10.5 per cent year-over-year to $98.1 million with EBITDA down 3.7 per cent to $23.7 million. MFC said the recovery in case volume was continuing but that operations were still down compared to pre-COVID.

And Horrar struck a conservative tone in his Q2 comments, saying in a press release, “We continue to be cautiously optimistic in our outlook for the remainder of 2021. While vaccines continue to roll out across the country, there is still a lot of uncertainty due to the Delta variant.”

But it’s that upward trend that has Healy, chairman of Strategic Analysis Corporation, feeling bullish on MFC, enough for him to give the stock his Top Pick rating for the next 12 months.

“Because of COVID, the availability of elective surgical services has collapsed. And now, as we get over this pandemic, hopefully, they will be coming back. And my reading on the demand for elective surgical services is that it’s right out of sight because there has been almost a year and a half now where people haven’t been able to get them in and the pent up demand is just astonishing,” said Healy, speaking on BNN Bloomberg on Wednesday.

In terms of share price, MFC had a rough couple of years where the stock went from about C$17 at the start of 2019 to under C$5 by early 2020. DR bottomed out at two bucks and change in March of 2020 and admirably climbed back up to $7 before the year was out. For 2021, the stock is currently up about 35 per cent and is trading in the mid-$9 range.

Healy sees more upside.

“When I look at the historical valuation range of the company, it has been much higher than the stock is today, and much higher I mean like a factor of 50, 60, 70 per cent,” he said.

“ So, I think as things open up, people are going to flood back into Medical Facilities’ hospitals and the company could enjoy two or three booming years,” he said.