Is ATI physiotherapy (ATIP) an excellent investment choice?
1 Main Capital, an investment management firm, has released its letter to investors for the second quarter of 2021 – a copy of which can be downloaded here. A quarterly net return of 18.6% was achieved by the fund for the second quarter of 2021, ahead of its benchmark S&P 500 and Russell 2000 which returned 15.2% and 17.5% respectively for the same period. You can take a look at the top 5 holdings of the fund to get an overview of their top bets for 2021.
In 1 Main Capital’s Q2 2021 letter to investors, the fund mentioned ATI Physical Therapy, Inc. (NYSE: ATIP) and discussed its position on the company. ATI Physical Therapy, Inc. is a physical therapy service provider based in Bolingbrook, Illinois with a market capitalization of $ 849.4 million. ATIP has generated a return of -59.73% year-to-date and closed at $ 4.3 per share on August 31, 2021.
Here’s what 1 Main Capital has to say about ATI Physical Therapy, Inc. in its Q2 2021 Letter to Investors:
âIn letter Q3’20, I wrote about how PSPCs were used to help companies bypass the traditional IPO process when going public. In the letter, I noted how the number of PSPCs was exploding and how some sponsors recklessly pursued increasingly speculative deals at unreasonable valuations to meet the needs of retail speculators. However, not all sponsors acted this way; in fact, some PSPC sponsors announced mergers with good companies at reasonable valuations.
Recently, the SPAC bubble has started to deflate. One of the byproducts of this deflation, along with the large number of vehicles created, is that in some cases the baby was thrown out with the bathwater, creating exciting opportunities in de-PSPC businesses.
An example: the mandates of ATI Physical Therapy (ATIP), which went public by merging with a Fortress-sponsored SPAC last June. ATIP is the largest independent provider of outpatient physical therapy (OPT) in the United States with more than 800 clinics in 24 states.
OPT is an attractive end market in which to participate given the solid unitary economy of clinics as well as strong demand prospects. Specifically, an aging demographics, an emphasis on preventative care, and a more active population provide strong tailwinds of secular volume, while new OPT clinics have a rapid return on investment of around 13 months, on average. Typically, new units require about $ 250,000 in capital expenditure, $ 100,000 in initial absorption of start-up losses, and then generate about $ 175,000 in annual EBITDA upon maturity – not bad. Best of all, OPT has low costs per visit, and therapists can diagnose and treat over 70% of musculoskeletal conditions without any other provider. This helps prevent conditions from worsening as well as avoiding unnecessary and expensive doctor visits, medications, and surgeries. As such, it makes more sense for payers to focus on transferring volume to OPT clinics rather than trying to reduce the amount they pay them.
Given the attractive unit economy and growing demand, it makes sense to reinvest heavily in the business to pursue entirely new growth as well as the occasional attractive M&A opportunities. However, due to its private equity stake, the company has historically operated with high leverage, a problem COVID has further exacerbated, preventing it from pursuing attractive reinvestments. Since the SPAC merger finalized in June, ATIP has announced that it now has net debt of around $ 460 million, or just 2.6x 2022E EBITDA, which should allow it to invest more aggressively in the future.
Additionally, unlike many SPAC targets, Fortress has been tracking ATIP for nearly a decade as a corporate lender. Investors should take note that Fortress not only sponsored the deal, but also committed $ 75 million of its own capital to the deal through a PIPE and most importantly agreed to restructure its promotion as a earn-out. which is not fully vested until the stock reaches $ 16 per share.
Currently, ATIP sells less than 12x Consensus 2022 EBITDA, well below its closest counterpart (USPH), which sells over 20x Consensus 2022 EBITDA. Comfortable with ATIP, as the company’s PE sponsor sells its stake, and ATIP increases its EBITDA by opening new clinics and making profitable acquisitions, I expect the stock to increase significantly compared to current levels. If this were to happen, our warrants would be worth several multiples of our average cost, which is less than $ 2 per unit. “
Based on our calculations, ATI Physical Therapy, Inc. (NYSE: ATIP) was unable to secure a spot on our list of the 30 most popular stocks among hedge funds. ATIP was in 30 hedge fund portfolios at the end of the first half of 2021. ATI Physical Therapy, Inc. (NYSE: ATIP) has generated a return of -56.80% in the past 3 months.
The reputation of hedge funds as savvy investors has been tarnished over the past decade, as their hedged returns could not keep up with the unhedged returns of stock indices. Our research has shown that small cap hedge fund stock selection managed to beat the market by double digits every year between 1999 and 2016, but the margin for outperformance has shrunk in recent years. Nonetheless, we were still able to identify in advance a select group of hedge funds that have outperformed S&P 500 ETFs by 115 percentage points since March 2017 (see details here). We were also able to identify in advance a select group of hedge funds that underperformed the market by 10 percentage points per year between 2006 and 2017. Interestingly, the margin of underperformance of these stocks has increased in recent years. Investors who are long in the market and short on these stocks would have reported more than 27% per year between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: none. This article originally appeared on Insider Monkey.