PACS Group: Healthy debut for this acute care provider

stock PACS group (New York Stock Exchange:PACS) There were modest gains out of the IPO gate, with the stock up 10% on its first day of trading. Investors like the prospects for the California-focused post-acute care provider.

Although demographic trends favor the business, there are some questions about the business, its business model, and investor prospects. I look forward to learning more about the business after the public offering, but I don’t think there’s a need to get involved right now.

acute care

PACS Group describes itself as a leader in post-acute healthcare. Founded in 2013, PACS is focused on providing high-quality nursing care through a portfolio of independently operated facilities. In fact, the company has 200 facilities across nine states, serving approximately 20,000 patients every day.

These patients are treated by older people. Some communities offer care, assisted living, and independent living. Despite its size, the company sees its decentralized system as its greatest advantage, allowing incentivized management teams to organize the best care at individual locations, while scale brings synergies to the backend of the business.

This balanced approach should provide benefits to all stakeholders in the system, including patients, families, payers, administrators, and clinicians. Patients rely on acute facilities for individuals who need help recovering from an acute illness, illness, or serious medical procedure after being discharged from the hospital.

Skilled nursing facilities are key to providing these services in a market estimated to be worth $200 billion annually, with varying levels and intensities of care provided. Since its founding in 2013, the company has grown significantly and now operates 208 facilities (up to 57 locations opening in 2023) with approximately 23,000 beds, half of which are in California.

Valuation and IPO Thoughts

PACS Group had targeted selling 19.05 million shares with a preliminary price range of between $20 and $22 per share, with the final offer price set in the middle of that range. With an expanded offering of 21.4 million shares, the company received total proceeds of $450 million from the IPO.

With 147.8 million shares outstanding, the company has an equity valuation of $3.1 billion. This valuation slightly exceeds the net leverage the company uses, even after taking into account the fact that gross returns are primarily used to reduce leverage. Net debt is reported at $2.5 billion and the enterprise value is $5.6 billion. Net debt appears to be quite steep, as adjusted EBITDAR was posted at $455 million for a leverage ratio in the mid-5% range.

The company has grown rapidly, reaching $3.11 billion in revenue in 2023, with annual revenue increasing by more than 28%. With approximately 7.5 million patient days and 90% occupancy, average daily revenue is approximately $450 per used bed, with most of the revenue derived from Medicare and Medicaid.

Operating profit was reported at $208 million, with a margin of 6%. Despite the business’s rapid growth, operating profit in dollar terms declined from $229 million in 2022, with margins of nearly 10% at that time.

The company posted net income of $113 million, which equates to earnings of about $0.75 per share, which translates to a tricky earnings multiple. The interest expense is pegged at $50 million per year, which puzzles me a bit because the interest expense is limited relative to the debt load.

With the stock rising to $23 on the first day of trading, expectations were a bit higher, making me cautious about participating given the discussion above.

concluding thoughts

Considering the above discussion, it is clear that leverage and earning power are distinct risks. Because frankly, I couldn’t figure out why interest expenses were so low (relative to 2023 net debt load). This undoubtedly poses a risk to its earnings power in 2024.

Long-term demographic trends remain intact, but there are many other risks beyond valuation. These include dependence on the reimbursement policies of third-party payers, pressures on health care budgets, concentration in California, competition for these services, and concerns about quality of care.

Overall, I don’t share the market’s optimism, so I’m very cautious about getting involved. Nonetheless, the business’s ambitious growth and rosy long-term outlook make the stock interesting to keep an eye on going forward.