3 Reasons to Sell SGRY and 1 Stock to Buy Instead

Surgery Partners currently trades at $15.10 per share and has shown little upside over the past six months, posting a small loss of 2.7%. The stock also fell short of the S&P 500’s 9.3% gain during that period.

Is now the time to buy Surgery Partners, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Surgery Partners Not Exciting?

We’re cautious about Surgery Partners. Here are three reasons why SGRY doesn’t excite us, plus one stock we’d rather own.

1. Weak Sales Volumes Indicate Waning Demand

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Outpatient & Specialty Care company because there’s a ceiling to what customers will pay.

Over the last two years, Surgery Partners’s units sold averaged 3.5% year-on-year growth. This performance slightly lagged the sector and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Surgery Partners’s revenue to rise by 3.2%, a deceleration versus its 11.6% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will face some demand challenges.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Surgery Partners’s $3.80 billion of debt exceeds the $182.3 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $524.6 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Surgery Partners could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Surgery Partners can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Surgery Partners isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 31.4× forward P/E (or $15.10 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at the most entrenched endpoint security platform on the market.

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