TeamHealth Holdings Inc. (TMH): Leading Provider of Outsourced Physician Staffing Services Is Set to Benefit from Acquisitions, ObamaCare
TeamHealth Holdings, Inc. (TMH) is a leading provider of outsourced physician staffing solutions for hospitals with approximately 860 hospital clients and clinics across 46 states and affiliations with over 9,700 healthcare professionals. TeamHealth has an attractive suite of core service lines as an industry leader in emergency medicine, anesthesia management and in-patient services, supplemented by pediatrics, locums, urgent care and military staffing. TeamHealth’s compelling value proposition drives high client and physician satisfaction which delivers 94% client renewal and 92% physician retention. And TeamHealth is well positioned to benefit from recent healthcare reforms.
Over the past seven years, TeamHealth has delivered total annualized returns of 32.6%, well above the 14.9% delivered by the S&P. The company does not pay dividends.
With consensus earnings growth of 15.3%, FastGraphs estimates that shares could rise to near $63 by December 2019 with an estimated annualized return of 5% which likely factors in the sharp rise in shares over the past few years. However, strong acquisitions could significantly boost valuation above FastGraph estimates.
On April 30, 2014, the company reported a 30% increase in Q1 2014 net earnings on 11.4% revenue growth and 19.2% adjusted EBITDA growth. Wall Street welcomed the earnings report which beat street estimates by $0.04 and shares bumped up 2.52% to $48.48 with market capitalization of $3.4 billion (well above book value of $300 million) and a rather rich P/E of 39x that bakes in a lot of the upside.
TeamHealth has a leading market position in a highly-fragmented market with favorable industry dynamics which will help the company expand its share in the $10 billion emergency (ED), $15 billion anesthesia and $8 billion hospital medicine markets. The company has a proven business model that delivers significant value, with a scalable national infrastructure that is a solid competitive advantage. TeamHealth has a multi-faceted growth portfolio and an attractive financial platform to support future growth.
The company delivered 19% revenue growth in 2012 and 15% in 2013, and reduced its leverage from 4.1x Adjusted EBITDA to 2.0x as of year end 2013 even though it made several notable acquisitions in 2012, 2013 and 2014 year-to-date as part of its core growth strategy.
TeamHealth has a national presence with long-standing customer relationships with an average contract tenure of 15 years with each of its top 50 clients, which underscores the stability of its business model and cash flows.
Set to Benefit from Patient Protection and Affordable Care Act (PPACA)
TeamHealth has several industry tailwinds that should drive growth. The PPACA aims to increase health benefit for the uninsured and under-insured populations, with the Congressional Budget Office projecting 25 million insurance sign-ups by year-end 2017. This increase in the insured population will increase patient volumes and improve the payor mix, especially for emergency services.
Hospitals face a challenging operating environment and TeamHealth’s hospital-based physician groups are a major solution that helps hospitals maintain their revenue base, drive cost improvement and enhance operating efficiencies. Tighter budgets and pay-for-performance models necessitate high-quality processes to drive improvements in patient outcomes, which TeamHelath delivers on.
Industry dynamics will also drive increased utilization in the face of continuing primary care shortage, aging U.S. population demographics, a 3% to 4% annual growth in ER and patient visits.
TeamHealth Business Model
TeamHealth fundamental business model is simple, replicable and highly scalable. The company signs exclusive multi-year contracts with hospitals (to provide clinical staffing), and recruits high-quality local physicians to provide patient care. TeamHealth also provides turnkey practice support to the groups with negotiated managed care contracts with payors, billing, code-verification and collection services, and professional liability insurance. In addition, TeamHealth selectively provides value-added consulting services to hospital clients.
Physicians like this model because it gives them stable practice opportunities with well-regarded local hospitals, along with competitive compensation and a physician-friendly environment with comprehensive practice management services, continuing medical education, opportunities for career advancement and leadership opportunities at all levels within the organization. The company’s 92% physician retention rate underscores the value derived by physicians that opt to join TeamHealth.
Moreover, hospitals depend on physician services for their success in TeamHealth’s core markets. Emergency departments are a key source of in and out-patient revenues; anesthesiologists are crucial to hospitals’ most-profitable surgery services; and good hospital services are essential for cost-effective in-patient care, high patient satisfaction, low cost treatment and higher reimbursements.
Scalable National Infrastructure Drives Value, Competitive Advantage
TeamHealth has 19 regional offices to more closely service its clients, centralized administrative functions (accounting, payroll, IT), four billing centers for efficient non-bottlenecked claims and quick payment and centralized risk and claims management.
TeamHealth has made significant investments in IT infrastructure and proprietary systems, such as an Emergency Department dashboard and an online CME portal for physicians, which drive operating results.
Overall, TeamHealth has a disciplined approach to client selection and retention, high hospital client satisfaction, low physician turnover, comprehensive revenue cycle management, deep clinical and technological expertise and innovative patient safety and risk management initiatives.
This disciplined operational approach drives revenue visibility and consistency, increases patient volumes and revenue per visit and strengthens cash flow.
Three-Tiered Growth Strategy
The company’s core growth strategy focuses on driving same contract revenue growth, winning new contracts and executing its M&A strategy in a fragmented landscape.
Same contract revenue growth comes from higher patient volumes and higher revenue per visit. Over the past eight years, same contract revenue has grown in the mid-single-digits, in a range of 3.5% to 6.1%.
For new contracts, TeamHealth is focused on three attractive core markets – emergency, anesthesia and hospital medicine – and is well positioned to grow and win market share through longstanding customer relationships, strong client referrals, a diverse geographic footprint and a compelling overall value proposition.
TeamHealth has grown significantly through disciplined acquisitions that have mostly been accretive to earnings, solidified existing market share and enabled new market entry. Management believes the fragmented landscape is ripe for consolidation with robust future growth opportunities. In 2013, TeamHealth spent $188.2 million on acquisitions.
Solid History of Growing Revenue, Profit and Cash Flow
As the chart below shows, over the past five years, TeamHealth has consistently grown revenue, EBITDA and cash flow, with fluctuations in cash flow attributed to acquisition-related volatility. The company has also held margins steady at 10.5% indicating its ability to absorb acquisitions into its existing business model and deliver consistent profitability.
Additionally, long-term contracts and a diversified mix of payors provide additional stability to the company’s revenue base.
In parallel, management is solidly focused on debt-reduction as a percentage of EBITDA, while increasing debt coverage ratios. At year end 2013, the company’s net debt was 1.9x Adjusted EBITDA, down from 2.9x at the end of 2009, and its interest coverage ratio jumped from 4.1x Adjusted EBITDA/Interest to 16.9x.
Exceptionally Strong and Proven Management Team
TeamHealth is headed by CEO Greg Roth who has been at the helm since November 2004. Roth has an accounting background and extensive operational and leadership experience in the healthcare arena. Since joining the company, Roth has delivered exceptional value to shareholders.
Michael Snow serves as President and oversees operations, administration and sales and marketing. He joined the company in April 2013 and has extensive operational experience in the healthcare delivery arena.
David Jones, CFO, joined the company as controller in 1994 and was promoted to CFO in 1996. He is responsible for all accounting and financial matters, and is involved in all key strategic decisions.
In addition, senior management includes practice leaders and a physician leadership council that advises the company.
Q1 2014 Performance – 11% Revenue, 30% Profit Growth
TeamHealth had a strong first quarter (Q1 2014 ended March 31, 2014) with an 11.4% increase in net revenue to $641.7 million, the 14th consecutive quarter of top-line growth despite tough weather conditions in several of the company’s markets. Of the 11.4% growth, acquisitions contributed 7.2% ($41.2 million in new revenue), same contract revenue 2.6% ($14.9 million increase) and net sales growth brought in 1.6% ($9.6 million).
In the quarter, operating margins improved and the company saw additional opportunities from the expansion in Medicaid with improving payor mix and volume growth from the newly insured.
The company reported net earnings of $23.8 million ($0.33 per diluted share), a solid 30% increase over Q1 2013. Adjusted EBITDA was up 19.2% to $71.8 million and operating activities generated $34.2 million in cash, about a 3% increase over the year-ago quarter.
At quarter end, TeamHealth had $56.6 million in cash and $250 million in available credit facility, with total outstanding debt of $497.5 million on total assets of $1.39 billion and shareholders’ equity of $299.6 million.
For the full year, TeamHealth expects 11% to 12% growth in net revenue and adjusted EBITDA margin of 10.5%.
TeamHealth had a strong 2013 with 15% top- and bottom-line growth, clearly benefiting from a boost in the number of insured Americans under the Affordable Care Act, and a strong start to 2014 with 30% earnings growth in Q1. However, the political controversy over ObamaCare could see a fluctuation in funding if political winds shift and Medicaid funding is cut. CEO Roth and his team have displayed a keen knack for accretive and targeted acquisitions in specific markets which could deliver the right mix between patient volume increases and above-average reimbursement rates, and boost results. While TeamHealth is a solid performer, shares appear a little rich on valuation making this the perfect stock for a sound options-based strategy for portfolio protection and income generation.