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MEDNAX's Ratings Get Affirmed by Moody's, Outlook Negative

Zacks Equity Research

Credit rating giant Moody’s Investors Service affirmed MEDNAX, Inc.'s MD Ba2 Corporate Family Rating, the Ba2-PD Probability of Default Rating and the Ba2 rating on its unsecured bonds due in 2023 and 2027. However, the outlook was altered to negative from stable.

Ratings Representation

This revised negative outlook reflects MEDNAX’s eroding profit margins due to high compensation costs, mainly in its anesthesia business. In the last couple of years, the company’s debt/EBITDA increased by around a turn to 3.6 times (as of Sep 30, 2109). This new outlook also emphasizes the unpredictability regarding the company’s return to earnings growth via its current restructuring initiatives.

Meanwhile, the affirmation of the ratings underlines the company’s high free cash flow. The credit rating agency expects MEDNAX to generate more than $250 million of free cash flow. This apart, it also confirms that the company is well-equipped with balanced financial policies.  

Factors Driving the Ratings

The company’s Ba2 Corporate Family Rating acknowledges its solid status in neonatology and anesthesiology, exposure to the changing regulatory landscape revolving around reimbursements and its moderate leverage. The rating authority also anticipates the company’s leverage with debt/EBITDA to stay above 3.5x for 2020.

However, the credit rating giant expects the leverage to improve as MEDNAX works on its margins over time through restructuring plans. The company’s rating is further cushioned by customer diversity, healthcare services that are outsourcing market trends, liquidity level and buyouts.

The company's Speculative Grade Liquidity -1 Rating supports Moody’s expectation for MEDNAX to maintain solid liquidity over the next year.  An upgrade is not likely to take place over the upcoming 12-18 months.

Factors That can Change the Outlook

The ratings can see a constant upgrade over a considerable period of time provided the company can manage its buyout strategies and execute its cost-saving plans.  Ratings could be enhanced if debt/EBITDA is retained below 2.5 times.

Also, the ratings can see a downgrade if the company is unable to improve its operating performance and quantitatively, ratings could again decline if debt/EBITDA is sustained above 3.5 times.

Shares of this Zacks Rank #3 (Hold) company have lost 34.5% in a year’s time against its industry’s growth of 4.1%.


Downward Estimate Revision

The stock has witnessed a downward revision in 2019 and 2020. Earnings estimates have moved 0.9% and 2% south, respectively, over the past seven days. With the recent revision of rating outlook to negative, the stock might further trigger a downward revision in earnings estimates.

Stocks to Consider

Investors interested in the medical sector can take a look at some better-ranked stocks like HCA Healthcare, Inc. HCA, Tenet Healthcare Corporation THC and WellCare Health Plans, Inc. WCG. You can see the complete list of today’s Zacks #1 Rank stocks here.

HCA Healthcare provides health care services. In the trailing four quarters, the company came up with average beat of 9.3%. It carries a Zacks Rank #2 (Buy).

Tenet Healthcare works as a diversified healthcare services company. In the last four quarters, the company delivered average beat of 81.7%. The stock has a Zacks Rank of 2.

WellCare Health provides government-sponsored managed care services. In the last four quarters, the company pulled off average beat of 17.3%. It sports a Zacks Rank #1 (Strong Buy).

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