Here’s Why Surgery Partners Could Be the Next Hot Takeover

Key Points

• Surgery Partners is the third-largest operator of ambulatory surgery centers (ASCs) in the United States, with over 200 locations.
• ASCs provide non-emergency surgical procedures for up to 50% less than general acute care hospitals, resulting in cost savings for both patients and insurance carriers.
• Health insurance companies that are evolving into integrated healthcare companies and Surgery Partners would be a solid fit.

With the stock markets trading near highs again and the start of a lower interest rates cycle, the backdrop for mergers, spin-offs, and acquisitions continues to improve. Elevated stock prices are just as good as currency when trying to acquire another company. The Sept. 24, 2024, announcement that Smartsheet Inc. NYSE: SMAR will be acquired by Blackstone and Vista Equity Partners for $56.50 per share or $8.4 billion is a prime example of the improving backdrop.

Prior to the news, plenty of speculation and rumors were swirling around about the work collaboration software provider. Investors looking for another potential and logical buyout candidate in the healthcare sector can take a close look at Surgery Partners Inc. NASDAQ: SGRY.

The Acute Care Boom Is Real, and Health Insurers Are Scrambling

The acute care boom has been a growth driver for Surgery Partners, which owns and operates surgical hospitals, centers and ambulatory facilities, providing high-quality care at lower prices than general hospitals. The acute care surge that started in the fall of 2023 shocked health insurers like Humana Inc. NYSE: HUM, causing them to lower their earnings forecasts for the next two years. There was a significant rise in inpatient utilization from their Medicare Advantage members.

Due to the significantly lower prices, patients and insurance carriers prefer non-emergency procedures to be often handled at these specialized facilities rather than acute care hospitals. Their specialized facilities have lower overhead, more efficiency and less complexity.

Procedures performed at surgical centers can cost 50% less than at a traditional hospital. Many of these facilities have already negotiated rates with the major insurers, resulting in lower out-of-pocket expenses for the patients as well. Due to the lower costs, health insurance companies prefer outpatient surgical centers and ambulatory facilities over hospitals.

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Surgery Partners Raises 2024 Revenue Forecast

Surgery Partners reported their second-quarter 2024 EPS of 21 cents, beating analyst expectations by a penny. Revenues rose 14.2% YoY to $762.1 million, beating consensus estimates of $735.94 million. The key metrics were strong as same-facility revenues grew 10% YoY, and same-facility cases rose 3.9% YoY. The company raised its full-year 2024 revenue forecast to at least $3.075 billion, beating consensus estimates of $3.06 billion.

Takeover Speculation Makes Sense for Integrated Health Care Transformation

Insurance carriers love Surgery Partners so much that there is speculation that UnitedHealth Group NYSE: UNH may be interested in acquiring them. Private equity firms are also very interested in the nation's third-largest ambulatory surgical center (ABC) operator. As more insurers evolve into integrated healthcare companies like Kaiser Permanente and as CVS Health Co. NYSE: CVS did with its acquisition of Aetna Health Insurance, interest in Surgery Partners will continue to grow. Bain Capital is Surgery Partners' largest shareholder, with a 39% stake.

SGRY Is Forming an Ascending Triangle Breakout

An ascending triangle pattern is comprised of a flat-top horizontal upper trendline resistance converging with an ascending (rising) lower trendline support to meet at the apex point. The breakout occurs when the stock surges through the upper trendline, and a breakdown occurs when the stock falls below the rising trendline.

SGRY formed the flat-top upper trendline resistance at $33.95 after it deflected two breakout attempts. This pushed shares to the rising lower trendline and indicated growing demand as buyers raised their bids. The anchored daily VWAP support is at $29.15. SGRY continues to move closer to the apex point, where it can break out through the $33.95 upper trendline or fall below the $31.75 lower trendline.

The daily relative strength index (RSI) is stalled at the 58-band. Fibonacci (Fib) pullback support levels are at $31.08, $29.95, $28.35, and $25.78.

Surgery Partners’ average consensus price target is $39.86, and its highest analyst price target is $50.00.