Accretive Health ($ACHI)- An industry leader's pending restatement will show strong free cash flows and expanding margins ...
(Update 20DEC2014- Accretive announced that the restatements expected mid-December will now be posted on December 30th after the market close.)
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Executive Summary
Accretive Health is a Revenue Cycle Management (RCM) industry leader that will soon be re-rated as they restate three years of financials. We see a 1:4 risk to reward ratio as the company restates, and further catalysts as the company uplists and management builds out the customer base.
Summary
Accretive Health is a poster company for things that have gone wrong. Starting in 2011, on the back of losing a computer that contained unencrypted customer data, Accretive lost a key customer and business relationships in Minnesota. Soon after, in 2012, Accretive announced that all of its past SEC financial filings (3 years worth) would be restated through an audit.
Over the next year, the company replaced its CEO and executives. This past March, the company missed its restatement timeline and delisted from the NYSE. Further, three weeks after the delisting, the company announced that its replacement CEO, Steve Shuckenbrock, would step down after his one-year commitment ends this October. All told, a mess.
We like this mess, as we see clear signs that the company is not only a going concern, but has a foundation on which to further expand as the industry leader. The company has no debt and a quarter of its market cap is in cash. The company has stated that the audit restatement is above the line and will have no affect on cash and no affect on cumulative net income or EBITDA.
Steve Schulman, a proven 40-year veteran of the healthcare industry, took over as Chairman of the Board in April, providing further confidence that there is no malfeasance in the reports. Steve led two healthcare companies through turnarounds, selling one. The CEO, Dr. Emad Rizk, was announced in July. He comes with 25 years experience and is recognized as a renowned healthcare industry expert. He comes with great connections in industry and a focused attention on client relationships, culture and operational excellence.
Post restatement, Accretive is near 8x EV/EBITDA and a projected 1.5x sales. Prior to the restatement, Accretive traded closer to 12x EBITDA and up to 21x EBITDA. Competitors trade near 11x EV/EBITD. As a high mark, a smaller competitor was just purchased for 3.8x revenue. At $8, free cash flow yield is closer to 10% as their contracts have matured. We anticipate an initial re-rating and further upside as the company builds out.
Potential Catalyst
The near term catalysts is the restatement, expected mid-December 2014. A future catalysts will be an uplisting back into the NYSE. Jumping ahead, Accretive represents a great candidate for a buy-out as stability returns to the company.
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