Leverage And CMS Shifts Will Curb Earnings Yet Spark Recovery

Key Takeaways

• Delayed facility openings, slower acquisition benefits, and reimbursement pressures threaten revenue growth and margin improvement despite investments in robotics and higher acuity care.
  
• High leverage and competition from larger operators constrain free cash flow and may hinder future growth, even as outpatient surgery demand rises.
  
• Elevated debt, regulatory pressures, slowed acquisitions, and rising costs are constraining growth, squeezing margins, and limiting operational and financial flexibility.

Catalysts

Owns and operates a network of surgical facilities and ancillary services in the United States.

• While Surgery Partners benefits from an aging U.S. population and rising demand for outpatient procedures, the timing and magnitude of revenue growth may be limited by slower than expected execution on de novo facility openings and delayed contributions from acquisitions-which prolongs the ramp period before these investments yield meaningful EBITDA and margin improvements.
  
• Although the company's expanding capabilities in higher acuity procedures (like orthopedics and cardiovascular) and investments in surgical robotics support a higher average revenue per procedure, there remains substantial risk that reimbursement rates will not keep pace with cost inflation, pressuring net margins as labor and supply costs continue to rise.
  
• Despite regulatory momentum, such as the proposed phase-out of the inpatient-only list and CMS adding new procedures to the ASC setting, the practical volume opportunity unlocked by these changes may be more gradual than forecasted, translating into a slower increase in procedure volumes and revenue than the broader addressable market growth would suggest.
  
• While disciplined M&A and portfolio optimization theoretically position the company for sustained growth and deleveraging, ongoing high leverage and increased interest expense-exacerbated by the expiration of favorable interest rate swaps-create significant headwinds for free cash flow and limit flexibility for further growth investments.
  
• Even with secular tailwinds like the shift toward outpatient care and technological advancements in minimally invasive surgery, intensifying competition from hospital systems and national ASC operators may force Surgery Partners to increase spending on physician recruitment or accept lower pricing, thereby diluting expected improvements in earnings and core profitability over the medium term.

Surgery Partners Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Surgery Partners compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Surgery Partners's revenue will grow by 8.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -5.6% today to 0.6% in 3 years time.
• The bearish analysts expect earnings to reach $24.2 million (and earnings per share of $0.18) by about September 2028, up from $-180.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 161.0x on those 2028 earnings, up from -15.8x today. This future PE is greater than the current PE for the US Healthcare industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.68%, as per the Simply Wall St company report.

Surgery Partners Future Earnings Per Share Growth

Risks

• Elevated leverage and a $2.2 billion corporate debt burden, now facing higher floating interest rates after the expiration of fixed interest rate swaps, is increasing interest expense and pressuring operating cash flows, limiting flexibility for reinvestment and growth.
  
• Slowed pace of acquisitions so far in 2025, with only $66 million deployed out of a $200 million target, reduces the likelihood of achieving the high end of revenue and EBITDA guidance, directly impacting long-term earnings growth projections.
  
• Ongoing regulatory scrutiny, including possible further reimbursement changes from Medicare and commercial payers, as well as new site neutrality and price transparency rules, could compress reimbursement rates and erode net margins across the portfolio.
  
• Portfolio optimization strategies, including potential divestitures and expanded partnerships with health systems, signal that some assets or service lines are underperforming or non-core, and may reduce near-term revenue and dilute the consolidated earnings base.
  
• Rising labor costs and continued wage pressure in the healthcare sector, combined with acknowledged variability in professional and other expenses, threaten operational efficiency and could erode EBITDA margins as Surgery Partners expands into higher acuity and more complex procedures.

Valuation

• The assumed bearish price target for Surgery Partners is $24.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Surgery Partners's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $36.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $24.2 million, and it would be trading on a PE ratio of 161.0x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $22.36, the bearish analyst price target of $24.0 is 6.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.