Sunday, July 19, 2015

Not So Accretive

ACHI Tanks

I have probably thought about Accretive Health (ACHI) a half dozen times over the past year.  It is in healthcare, which is booming. It has been on the list since January.  But I saw some red flags, which thankfully I paid attention to.

I think the first flag was that they had not reported earnings in about a year.  I will not always throw a stock out over that (I bought CIM once), but I needed some confirmation that things were "ok".  A big hedge fund buying them would be a signal.  I read this press release looking for clues (Accretive Health Completes Financial Restatement and Provides Business Update).

In this document, they projected that gross cash generated from customer contracting in 2014 would be $223m to $233m.  For 2015 they projected a range of $225m to $235m.  In 2012 the number was $272m and in 2013 it was $252m.  This was not a company going in the right direction.

Then looking at their balance sheet, their assets were $510m (of which $122m is a deferred tax asset, which my read is that has no value unless they're making money) and liabilities were a whopping $596m.  So over $85m of negative equity, giving 100% credit to the $122m deferred tax asset.

I had seen enough and took a pass.

On Friday they dropped 50%.  Ascension Health, a company that works closely with ACHI (50% of revenues), offered to buy them (unsolicited) for a price that was 50% the current stock price.

Gad, what a slap in the face.  Your biggest partner makes a bid to take you private, but they only offer 50% of your current stock price!

Strategic Alternatives

So now ACHI had hired a banker to explore strategic alternatives.  I guess the $64 question is whether someone thinks they're worth more than $2.70 a share.  Whoa, just looked at their most recent 10K.  The quick answer is "no". That -85m of equity has ballooned since the end of 2013 to -$170m.  This is a company bleeding cash, losing 25 to 30m a quarter.  Soon they'll have no choice but to accept offer on table.

MFI Tracking

The 50% tanking of ACHI has put a leak in the MFI Tracking returns so far.  The open portfolios are now trailing by an average of 2.5 points. And only one of 12 portfolios is winning.  I did put them in my May 2015 "Rejects" portfolio (10 MFI stocks I considered but did not select).  That portfolio is now down over 5%.

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