Forget TD's $10 Target!Today TD has slashed its 12 month target from $10 to $5.50 and cut if from a BUY to a HOLD.
Event
We are downgrading CRH to HOLD from Buy and lowering our target price to C$5.50 from C$10.00 to reflect CMS' recently proposed reimbursement terms.
CMS (Center for Medicare and Medicaid Services) has proposed a comprehensive restructuring of the CPT (Current Procedural Terminology) codes that cover anesthesiology used in conjunction with endoscopy. Included are five new codes, replacing the original 00740 and 00810 codes. The new codes describe the various endoscopic procedures with greater specificity than the old codes. Although the changes include a mix of rate-cuts and increases, we believe that the net effect could be an 8.5% reduction in CRH's realized rates.
Impact: NEGATIVE We are reducing our F2018 estimates to reflect January 1, 2018 adoption of the proposed terms across CRH's book of business. We have also lowered our F2018 acquisition outlook, citing reduced visibility into the M&A landscape in light of the recent news.
Our Revisions — We are maintaining our F2017 estimates, but reducing our F2018 revenue estimate to $115.8 million from $134.4 million. Included is a 15.3% reduction in anesthesiology revenues. This includes both the aforementioned ratereduction and a revision to our F2018 acquisition forecast. We have reduced our 2018 Adjusted EBITDA forecast to $56.7 million from $73.8 million to reflect the revenue changes. The underlying assumption is that the proposed rules are implemented as is on January 1, 2018.
The Path Forward — Considering the five-month lag to the implementation of this new reimbursement format, we believe that it could be several quarters before investors regain comfort regarding CRH's EBITDA outlook. Similarly, there is a risk of increased uncertainty in CRH's M&A pipeline, as potential sellers may opt to re-evaluate their business prospects and M&A options.
TD Investment Conclusion
Our target price and rating revisions reflect a combination of revised EBITDA forecasts, in addition to the likelihood that the reimbursement question could create an overhang. If so, the stock could be range-bound for several quarters. Nonetheless, several long-term positives are worth highlighting: 1) leadership in a defensive, growing segment of the U.S. healthcare services market; 2) a healthy balance sheet and high-margin cash flow streams; and 3) expansion opportunities.