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MEDNAX Plunges More Than 42% YTD: Will the Stock Rebound?

MEDNAX Inc.’s MD stock has declined so far this year due to the widespread volatility induced by the COVID-19 pandemic and weak first-quarter 2020 earnings.

This Zacks Rank #4 (Sell) company has lost 42.8% year to date, wider than its industry's decline of 27%. The price performance is weaker than the stock movements of other companies in the same space, such as HCA Healthcare, Inc. HCA, Acadia Healthcare Company Inc. ACHC and Tenet Healthcare Corporation    THC, which have shed 26.2%, 13.8% and 37.4% of respective values in the same time frame. Each stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the first quarter, the company reported adjusted earnings of 32 cents per share, missing the Zacks Consensus Estimate by 23.8%. Moreover, the bottom line plunged 50.8% year over year. Same unit revenues too dipped 1% year over year. The top line also slid 0.6% from the year-ago period.
The company’s results were negatively impacted by the coronavirus. In fact, the outbreak dented patient volumes as well as revenues.

Given the current pandemic-led uncertainty, the company scrapped its previously-announced quarterly and 2020 outlook. Within its Radiology Solutions, orders for radiological studies also witnessed a downfall. Further, its office-based practises, such as maternal-fetal medicine, pediatric cardiology and numerous pediatric subspecialties saw appointment cancellations from historical normal levels.

The company is grappling with issues like steep expenses for the past many years. More concerning is the rate of increase in expenses surpassing the revenue improvement in the past four years. In the first quarter of 2020, general and administrative expenses inched up 3.3% to $105.2 million. Though the company has undertaken cost-curbing initiatives, high labor costs should persistently weigh on salaries and the benefit component of total expenses. Steep expenses might also dent the company’s margins.

MEDNAX’s debt level including long-term loans has been climbing over the past several years. Its times interest earned stands at -10.24X, comparing unfavorably with its industry’s average of 2.74X.

Will the Stock Make a Recovery?

The company has been taking several initiatives to tackle the ongoing crisis. It completed the sale of its American Anesthesiology to North American Partners in Anesthesia (NAPA) to avoid cash losses. In fact, it anticipated the COVID-19 pandemic to induce a cash loss of at least $150-$250 million for American Anesthesiology.

For April, the company estimates the operating revenues for American Anesthesiology to be below the pre-COVID-19 outlook by around 60-70% on a preliminary basis. The sale is expected to mitigate the COVID-19 effect on its revenues and operations to some extent. The company received around $160 million in cash and retention of net working capital, primarily accounts receivable. It also earned a contingent consideration in the combined NAPA entity for up to $250 million, subject to conditions.

Against all odds, it should be noted that the company’s solid fundamentals will help it turn around once the overall economic condition improves.

In response to the current environment of uncertainty, the company took several initiatives to control costs, such as temporary salary reductions, furloughing employees, etc.

Given the nature of services it provides, we expect most deferrals to cause a backlog of demand going forward.

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