PACS Group: A Healthy Debut For This Acute Care Provider

Shares of PACS Group (NYSE:PACS) have seen modest gains coming out of the IPO gate, as shares are trading up 10% on the first day of trading. Investors like the prospects for the post-acute healthcare provider, with a massive focus on California.

While demographic trends favor the business, I have some questions on the business, its business model, and prospects for investors. Right here, I feel no need to get involved just yet, although I look forward to learning more about the business post the public offering.

Post Acute Healthcare

PACS Group describes itself as a leading post-acute healthcare company. Founded in 2013, PACS focuses on delivering high-quality nursing care through a portfolio of independently operated facilities. In fact, the company has 200 facilities, across 9 states, serving some 20,000 patients on a daily basis.

These patients receive senior care, assisted living, and independent living in some communities. Despite its scale, the company sees the decentralized system as its greatest benefit, allowing incentivized management teams to organize the best care on individual locations, while scale brings synergies toward the back-end of the business.

This balanced approach should drive benefits to all stakeholders in the system including patients, families, payers, administrators and clinicians. Patients rely on post-acute facilities for individuals which need help to recuperate from acute conditions, illnesses, or serious medical procedures after they have been discharged from the hospital.

Skilled-nurses facilities are key in providing these services, with various degrees and intensity of care being delivered in a market estimated to be worth $200 billion per annum. Since its founding in 2013, the company has grown substantially, now operating 208 facilities (after opening as much as 57 locations in 2023), carrying nearly 23,000 beds, half of which located in California.

Valuation & IPO Thoughts

PACS Group aimed to sell 19.05 million shares in a preliminary price range between $20 and $22 per share, as the final offer price was set right in the middle of the range. Amidst an upsized offering of 21.4 million shares, the company obtained gross proceeds from the IPO at $450 million.

With 147.8 million shares outstanding, the company commands a $3.1 billion equity valuation. This valuation just slightly exceeds net leverage employed by the company, even after taking into account the fact that gross proceeds are largely used to reduce leverage. Net debt is reported at $2.5 billion, for a $5.6 billion enterprise valuation. Net debt seems pretty steep as adjusted EBITDAR is posted at $455 million, for a leverage ratio in the mid-5s.

The company has seen rapid growth with 2023 revenues of $3.11 billion, with revenues up more than 28% on an annual basis. With some 7.5 million available patients days and 90% occupancy rates, average revenues per day come in around $450 per used bed, with most of the revenues derived from Medicare and Medicaid.

Operating profits were reported at $208 million, for margins of 6% and change. Despite the rapid growth of the business, operating profits in dollar terms were down from $229 million in 2022, at the time translating into margins of nearly 10%.

The company posted net earnings of $113 million, for earnings equal to about $0.75 per share, translating into a demanding earnings multiple. With interest expenses pegged at $50 million per annum, I was somewhat puzzled, as this interest expense is relatively limited in relation to the debt load.

With shares having risen to the $23 mark on the first day of trading, expectations have risen a bit further, making me cautious to get involved given the discussion above.

Concluding Thoughts

Given the discussion above, it is clear that leverage and earnings power are clear risks, as quite frankly I have not been able to figure out why interest expenses were so low (in relation to the net debt load in 2023). This arguably imposes a risk to the 2024 earnings power.

While the long term demographic trends are intact, there are many other risks outside the valuation. These include dependency on reimbursement policies from third-party payers, pressure on healthcare budgets, focus on California, competition for these services, concerns on quality of care, among others.

Weighing it altogether, I am not sharing the optimism by the market here, making me very cautious to get involved. Nonetheless, the ambitious growth of the business and rosy long-term prospects make the shares interesting enough to keep a close eye on going forward.