Leerink starts American Renal at outperform

Leerink Partners has launched coverage of American Renal Associates (NYSE:ARA) with an “outperform” rating and $33 price target. The stock closed at $27.71 on Friday.

“Our positive thesis contemplates a forward adjusted EBITDA (excluding non-controlling interest) growth rate of 13% (2015-2019 estimated CAGR) and is based on three growth pillars,” writes analyst Ana Gupte.

She said that firstly, the company’s independent dialysis model can capitalize on secular organic growth tailwinds in the end-stage renal disease dialysis market, with about 4% (CAGR 2000-2012) patient population growth, stabilizing Medicare reimbursement, though partially offset by headwinds from negative margin mix shift away from Commercial to Medicare.

Secondly, she said the attractive clinic joint venture model offers growth, as it is still largely untapped at less than about 5% of the available nephrologists base, which is leading to market share shifting from the large dialysis organizations.

And lastly, she cited margin expansion from the combination of organic and inorganic growth that offers scale efficiencies and leverage, particularly from higher margin incremental stations and treatment growth from increasing capacity utilization in existing clinics.