Ardent Health Partners, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Ardent Health Partners, Inc. operates a network of hospitals and related health care facilities, primarily in six states, focusing on providing a range of healthcare services and patient experience.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Ardent Health Partners, LLC is a for-profit company that operates acute care hospitals and other healthcare facilities, such as rehabilitation and surgical centers. Based out of Nashville, Tennessee, they operate 30 hospitals and over 200 sites of care. Their target markets include various segments, from rural communities to metropolitan cities. Notably, they hold a strong presence in Oklahoma, New Mexico, and Texas. They focus on providing comprehensive care, not just specific services.

Revenue Distribution: Ardent’s revenue primarily comes from providing healthcare services to patients. The majority of their revenue comes from three core business areas:

Medical/Surgical and Other Inpatient Services: Provide general inpatient care, medical specialties, and surgery services.
Outpatient Services: Consist of diagnostic and imaging services as well as physical therapy or rehabilitation, and outpatient surgeries.
Managed Care and Other Services: This category consists of services from risk-bearing arrangements with health plans, and some ancillary services such as pharmacy or imaging. The majority of revenue is usually from government insurance programs such as Medicare and Medicaid, with a small proportion also derived from third-party commercial insurers and self-pay patients. While a portion is also attributable to a smaller group of private care providers through joint ventures or partnerships.
- In 2023, 68% of revenues came from government insurance programs and 28% from commercial insurance.

Industry Trends and Competitive Landscape: The healthcare industry in the U.S. is experiencing several shifts, including:

Increased demand for services: An aging population and improved access to healthcare are increasing demand for healthcare services.
Consolidation and M&A: Industry consolidation is ongoing, particularly given the high cost of technology and infrastructure, resulting in a few larger national companies and several smaller, more concentrated players.
Technological advancements: Telemedicine and other innovative technologies are being adopted quickly, transforming traditional models of care delivery. There is also adoption of AI and other data-driven approaches to healthcare.
Value-Based Care: Payors (insurers) are pushing for a value-based approach to payments instead of a fee-for-service. That results in higher reimbursement based on quality outcomes rather than volume of services.
Staffing shortages and inflationary costs: Healthcare providers are facing higher labor costs, which makes the overall industry costlier and harder to do well. Competing in this environment can be challenging for a number of reasons. The healthcare industry can be complex with many regulations and a wide variety of needs that make a one size fits all approach tough. This is where economies of scale, good management, and innovative strategies become important to ensure good profitability and strong margins. While large healthcare systems can benefit from economies of scale, localized providers with a unique approach and a strong connection to their specific communities also play a significant role.

What Makes Ardent Health Partners Different:

Focus on Local Communities: While they are for-profit, Ardent claims to focus on providing high-quality care that is tailored to specific community needs. Many healthcare firms have started moving towards more community-focused approach, and ARDT seem to be riding that tailwind.
Partnership approach: To enter new markets, Ardent usually takes a partnership approach. That allows them to reduce the capital burden of entry, and reduce regulatory difficulties.
Investments in technology: Ardent is actively investing in technology to improve efficiency and patient care, which can improve their service and lower costs.
Proprietary platform: Their internal operating system, which is built for their specific needs and to streamline operations across their hospitals and other healthcare facilities can be a strong competitive advantage.
Good Financial Track Record: In general, their financial performance has been good, having shown consistent revenue growth and positive EPS for a long time.

Moat Rating: 2 / 5 Ardent’s moat is narrow for these reasons:

Switching Costs: Ardent benefits from customer switching costs to some extent. It’s costly and time consuming for patients to switch their preferred providers. Even for insurers, the risk of disruption, and complexity of the healthcare process means that they prefer stable providers. However, those costs are not high enough to create a wide moat. There are many alternatives available for healthcare, which puts downward pressure on pricing.
Economies of Scale: They have a wide network, which gives them a cost advantage. However, with local competition and other factors, there is no indication that it is large enough to create a large moat.
Intangible Assets: With some emphasis on the “patient experience,” they are trying to create brand loyalty, which can give them a minor moat. But given the prevalence of a large variety of options, many customers and insurers don’t have a strong brand preference, and it is hard for them to retain customers based on branding alone. * Their investment in a proprietary platform helps create unique operational experience, and may result in better returns on their investments compared to their competitors. But that is still in a nascent stage and not large enough to give them a sustainable competitive advantage.

In conclusion, the company does have a few advantages, however, none of them seem strong enough to create a wide, robust moat. This gives them a narrow moat with the ability to have better returns than their competitors, but not as high as a wide moat company.

Legitimate Risks to the Moat and Business Resilience

Regulatory Changes: As mentioned above, the healthcare industry is highly regulated. Changes to government programs and other regulatory rules can impact Ardent’s operations and profitability significantly. This is a threat that cannot be mitigated, and the company needs to be agile enough to respond when necessary.
Competition: The healthcare industry is very competitive. New companies are always entering the market, and incumbents are constantly innovating. Therefore, Ardent must also keep an eye on what its competitors are doing and continuously innovate to maintain a competitive advantage.
Uncertainty surrounding long-term growth: As the market matures over time and more competitors appear, Ardent’s strong growth may not continue for the long-term. Also, the healthcare industry is subjected to a lot of unforeseen circumstances like the Covid-19 pandemic, and its long-term implications are still unknown.
Debt Burden: Ardent currently has a total debt of around $5.6 Billion. This large amount of debt means that they need to generate a lot of cash to pay the lenders, which puts pressure on their margins. Furthermore, any increase in the interest rate can further erode their margins and make their business less profitable.
Pricing pressure: Ardent faces pressure from insurance companies as well as government programs to reduce costs. Any changes that require them to accept lower compensation rates can also negatively impact the company.

Despite the risks above, Ardent seems to be well-positioned to survive and perform well in the healthcare industry, especially with their current focus on growth and innovation. The management is quite competent and has a good history. They also have a fairly concentrated business presence that protects them better from competition and changes in the economy.

Financials (Analysis based on the most recent Q1 2024 Earnings report and 10-Q filing):

Revenue: Total revenue for the three months ended March 31, 2024, increased 14% to $1.44 Billion, with admissions and adjusted admissions up 5.6% and 7.7% respectively, compared to 2023. This shows a good improvement in their top-line performance due to operational efficiencies and increases in patient volume.
Operating Expenses: Total expenses increased 11.2% to $1.25 Billion, primarily driven by higher salaries and benefits, and an increase in supply costs. The company is making efforts to cut costs in certain areas, as we discuss later.
Net Income: Net income attributable to Ardent Health Partners increased 243% to $27.1M in the first quarter of 2024. This also indicates that the company has been effective in managing costs.
Adjusted EBITDA: Adjusted EBITDA for the three months ended March 31, 2024, stood at $221 Million compared to $137.7 Million in 2023. This signifies how efficiently the management is operating to produce greater profit relative to its peers.
Debt and Liquidity: The company has a substantial amount of debt of $5.6 billion. With almost $500M of cash in hand, it is important that their operating cash flow is strong, and management uses that cash wisely to both repay debt, invest in new growth areas, and expand on existing operations.
- There is an ongoing effort by the company to deleverage its balance sheet. This means reducing dependence on borrowed funds for investment by increasing equity. They have also taken steps to pay some of the debt to reduce the future interest payments that the company is obligated to make.
Capital Expenditure: Capital expenditure is at $182M, which is significant. Given their growth plans, they might be investing in growth opportunities like new hospitals, new equipment, or improved operations. We can also see from the financials that they are spending more on existing businesses in order to improve their efficiency.
A combination of strong revenue growth, growing profit margins, large capital expenditure, and a good history of consistent positive earnings make for a strong long-term player in the healthcare sector. This also allows us to say that Ardent has been quite good at generating value for shareholders, and is likely to continue to do so for a longer duration.

Recent Concerns, Controversies, and Management Actions

Cybersecurity incident: In November 2023, Ardent Health Partners reported experiencing a cybersecurity incident that disrupted some of their operations. Although they immediately shut down impacted systems and worked to protect customer data, this did impact their profitability for the quarter. * The full impact of the cybersecurity issue will likely be felt in the second quarter of 2024, when it will be completely known how much it has impacted the company.
- Management has stated they have enhanced their cybersecurity measures and are taking active steps to prevent similar incidents in the future. Given the nature of modern business operations, cyber attacks are inevitable, and the company should be judged on how well they are able to minimize the negative impact.
Impact of Medicaid Redetermination and Provider Taxes: Management acknowledged headwinds related to State-level Medicare redetermination and a transition away from pandemic relief which is putting some pressure on profitability. While these factors are outside of management control, it is expected that a solid long-term operating performance will be sufficient to counter these headwinds.
Unionization: Ardent is facing a push for unionization at several of its hospitals. While there is currently no major impact, and the company has been mostly cooperative with the workers, it is something that will be closely watched, to see how that impacts profitability and margins going forward.

Understandability: 3 / 5 The business model itself is not too complex to understand, but diving into the complexities of the healthcare industry, government regulations, and competitive advantages can make it difficult to accurately evaluate Ardent Health.

On one hand, it is easy to grasp that it is primarily a healthcare system, but the intricacies of insurance, different services and associated costs, and the business environment can be complicated. While their main idea, of operating a chain of hospitals with a focus on local communities, may be simple to understand.
The technical aspects of valuation, like understanding how insurance rates work, or projecting future revenues and expenses based on government programs, make it a 3 on the understandability scale.

Balance Sheet Health: 3 / 5 Ardent has a decent enough balance sheet. On one hand, their total debt levels are high, but the company is also taking steps to reduce that and improve its leverage.

While they have strong revenues, their debt to equity is still relatively high and that puts pressure on long-term profitability. With a good credit rating, their debt situation is not a deal-breaker, but could become a point of concern if the interest rates rise sharply or a recession reduces their profitability. While they have a high return on capital and have increased their cash reserves, they are still far away from completely reducing their dependency on debt. This makes the balance sheet of Ardent fairly healthy, but not robust, which deserves a rating of 3 on our scale.

In conclusion, Ardent is a very interesting business that is operating in a very competitive industry. Their value proposition of providing community focused care is resonating with a large number of local communities, which gives them a strategic advantage that may help them build a small moat.