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LifePoint Grows Inorganically Yet Stock Suffers: Here's Why

Zacks Equity Research

LifePoint Health, Inc. LPNT a hospital operator in non-urban markets, operates 72 hospital campuses in 22 states throughout the United States with 9,424 licensed beds in total.

The company has grown via a number of joint ventures, partnerships and acquisitions over the years.

Despite its efforts to grow inorganically, LifePoint’s shares returned 15.2% compared with a 31% gain for the Zacks categorized  Medical Hospital industry over the past three years. The underperformance speaks of integration headwinds following less-profitable acquisitions by the company that have drained its bottom line. The other challenges include bad debts and earnings volatility relating to seasonal sensitivity caused by conditions like the flu, declining levels of short-stay admissions or reduced readmissions.

In 2011, LifePoint formed Duke LifePoint, a joint venture, to leverage the clinical and quality of Duke with its management expertise and capital. Since its formation, through Dec 31, 2016, the company has completed the acquisition of 14 acute care hospitals and ancillary facilities through Duke LifePoint Healthcare. It has contributed meaningfully to the company’s top line as evident by a five-year CAGR of 137.6% for revenues.

In 2012, the company entered into a joint venture agreement with Norton Healthcare, Inc. to form the Regional Health Network (RHN) of Kentucky and Southern Indiana. Since its formation through Dec 31, 2016, the company has completed the acquisition of two acute care hospitals through RHN.

More recently, on Jan 1, 2017, the company entered into a joint venture agreement with a wholly owned subsidiary of LHC Group, Inc. to form In-Home Healthcare Partnership (IHHP), to own and operate its home health agencies and hospices as well as some of LHC’s home health agencies and hospices located near its hospitals.

Last year, the company added to its suite St. Francis Hospital, a 376-bed acute care hospital located in Columbus, GA. It also acquired Providence Hospitals, a 258-bed acute care hospital and Providence Hospital Northeast, a 74-bed acute care hospital in Columbia, SC.

From 2014–2016, acquisitions provided significant EBITDA growth opportunities. The acquisitions are in a transitional phase of outsized margin improvement in 2017, moving toward low double-digit margins. The company expects contribution to net revenue ($6.5 billion to $6.6 billion guided) of more than $2 billion and approximately $55 million of incremental adjusted EBITDA in 2017

Nevertheless, the company’s bottom-line is suffering as  the magnitude of increase in the company’s expenses is more than the growth in its revenues. Expenses increased at a CAGR of 12% from 2006–2015, while revenues grew 9.33%. The trend continued in 2016 with expenses increasing 25% against a revenue increase of 22%.

The company also suffers from high bad debts. Its allowance for doubtful accounts as of 2016, 2015 and 2014, was $891.2 million, $796.8 million and $709.5 million, respectively. Its provision for doubtful accounts for the years ended Dec 31, 2016, 2015, 2014 and 2013, was $909.6 million, $800.1 million, $817.8 million and $750.4 million, respectively. The company has long struggled to collect unpaid bills as any increase in uncollectible bills will hit its bottom line.

Zacks Rank & Stocks to Consider

LifePoint carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the medical sector include HCA Holdings, Inc. HCA, Inogen Inc. INGN and Avinger, Inc. AVGR. While Inogen sports a Zacks Rank #1 (Strong Buy), the other two companies hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

HCA Holdings surpassed earnings in the trailing four quarters with an average positive surprise of 10.16%.

Inogen delivered positive earnings surprises in three of the last four quarters with an average beat of 49.08%.

Avinger came up with positive earnings surprises in two of the last four quarters with an average beat of 4.35%.

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Inogen, Inc (INGN): Free Stock Analysis Report
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