Surgery Partners (SGRY)

Healthcare company Surgery Partners (NASDAQ:SGRY) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 8.2% year on year to $776 million. The company’s outlook for the full year was close to analysts’ estimates with revenue guided to $3.38 billion at the midpoint. Its non-GAAP profit of $0.04 per share was $0.01 below analysts’ consensus estimates.

Company Overview

With more than 180 locations across 33 states serving as alternatives to traditional hospital settings, Surgery Partners (NASDAQ:SGRY) operates a national network of outpatient surgical facilities including ambulatory surgery centers and short-stay surgical hospitals.

The outpatient and specialty care industry delivers targeted medical services in non-hospital settings that are often cost-effective compared to inpatient alternatives. This means that they are more desired as rising healthcare costs and ways to combat them become more and more top-of-mind. Outpatient and specialty care providers boast revenue streams that are stable due to the recurring nature of treatment for chronic conditions and long-term patient relationships. However, their reliance on government reimbursement programs like Medicare means stroke-of-the-pen risk. Additionally, scaling a network of facilities can be capital-intensive with uneven return profiles amid competition from integrated healthcare systems. Looking ahead, the industry is positioned to grow as demand for outpatient services expands, driven by aging populations, a rising prevalence of chronic diseases, and a shift toward value-based care models. Tailwinds include advancements in medical technology that support more complex procedures in outpatient settings and the increasing focus on preventive care, which can be aided by data and AI. However, headwinds such as reimbursement rate cuts, labor shortages, and the financial strain of digitization may temper growth.

Surgery Partners' main competitors include other ambulatory surgery center operators such as United Surgical Partners International (owned by Tenet Healthcare, NYSE:THC), AmSurg (part of Envision Healthcare), HCA Healthcare (NYSE:HCA), and SCA Health (owned by Optum, a UnitedHealth Group company, NYSE:UNH).

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $3.17 billion in revenue over the past 12 months, Surgery Partners has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, Surgery Partners’s 11.3% annualized revenue growth over the last five years was decent. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Surgery Partners’s annualized revenue growth of 10.3% over the last two years is below its five-year trend, but we still think the results were respectable.

We can dig further into the company’s revenue dynamics by analyzing its number of units sold. Over the last two years, Surgery Partners’s units sold averaged 3.2% year-on-year growth. Because this number is lower than its revenue growth, we can see the company benefited from price increases.

This quarter, Surgery Partners grew its revenue by 8.2% year on year, and its $776 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 9.1% over the next 12 months, similar to its two-year rate. Despite the slowdown, this projection is healthy and implies the market is forecasting success for its products and services.

Surgery Partners has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 12.1%, higher than the broader healthcare sector.

Analyzing the trend in its profitability, Surgery Partners’s operating margin decreased by 1 percentage points over the last five years. A silver lining is that on a two-year basis, its margin has stabilized. Still, shareholders will want to see Surgery Partners become more profitable in the future.

This quarter, Surgery Partners generated an operating profit margin of 8%, down 2.6 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Surgery Partners’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

In Q1, Surgery Partners reported EPS at $0.04, down from $0.10 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Surgery Partners’s full-year EPS of $0.88 to grow 24.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Surgery Partners has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 5.4% over the last five years, slightly better than the broader healthcare sector.

Taking a step back, we can see that Surgery Partners’s margin dropped by 6 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Surgery Partners burned through $16.7 million of cash in Q1, equivalent to a negative 2.2% margin. The company’s cash flow turned negative after being positive in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Surgery Partners’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 7.5%, slightly better than typical healthcare business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Uneventfully, Surgery Partners’s ROIC has stayed the same over the last few years. Given the company’s underwhelming financial performance in other areas, we’d like to see its returns improve before recommending the stock.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Surgery Partners’s $3.55 billion of debt exceeds the $229.3 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $514.6 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.

We were impressed by how significantly Surgery Partners beat analysts’ sales volume expectations this quarter. On the other hand, its EPS missed significantly and its revenue was just in line with Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 5.1% to $21 immediately following the results.

Updated: June 23, 2025 at 11:50 PM EDT

Are you wondering whether to buy Surgery Partners or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

First off, its revenue growth was good over the last five years. And while Surgery Partners’s cash profitability fell over the last five years, its astounding EPS growth over the last five years shows its profits are trickling down to shareholders.

Surgery Partners’s P/E ratio based on the next 12 months is 18.5x. All that said, we aren’t investing at the moment because its balance sheet makes us balk. Interested in this company and its prospects? We recommend you wait until it generates sufficient cash flows or raises money.

Wall Street analysts have a consensus one-year price target of $31.36 on the company (compared to the current share price of $20.25).