Over the past six months, Surgery Partners’s stock price fell to $21.62. Shareholders have lost 11.4% of their capital, which is disappointing considering the S&P 500 has climbed by 15.6%. This may have investors wondering how to approach the situation.
Is now the time to buy Surgery Partners, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Surgery Partners Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in Surgery Partners. Here are three reasons we avoid SGRY and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Outpatient & Specialty Care company because there’s a ceiling to what customers will pay.
Over the last two years, Surgery Partners’s units sold averaged 3.5% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Surgery Partners has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.3%, subpar for a healthcare business.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Surgery Partners’s $3.65 billion of debt exceeds the $250.1 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $525.3 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Surgery Partners could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Surgery Partners can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Surgery Partners’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 22.7× forward P/E (or $21.62 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at a top digital advertising platform riding the creator economy.
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