ATI Physical Therapy Stock: Down But Certainly Not Out (NYSE:ATIP)

If we look at a technical chart of ATI Physical Therapy, Inc. (NYSE:ATIP), we can see that shares have now managed to trade above both their 10 and 20-day moving averages. This gives hope that the 52-week low of approximately $1.60 a share which was printed on the 14th of March last will end up being a hard bottom for this stock. The MACD technical indicator remains in oversold territory, and it is also encouraging to see that its respective moving averages have not been diverging.

Regarding fiscal 2021 numbers, ATI grew its topline sales by 6% to come in at $628 million for the fiscal year. On the earnings side, the company reported an operating loss of approximately $18 million. Long-term investors though will continue to focus on that topline growth rate. Sales in fiscal 2020 are expected to grow by almost 10% to reach almost $690 million in fiscal 2022 despite scaling back on projected clinic openings this year (35). 58 clinics were actually opened in 2021 so it is quite a pull-back that most likely investors would not have expected.

There are a few reasons why management has taken a more conservative stance. For one, there is no point in rolling out new clinics if indeed they cannot be filled with qualified personnel. Although the Omicron wave resulted in multiple team members having to be quarantined at one point or another, strong competition in this space definitely resulted in labor headwinds for ATI last year. To combat this, management altered how workers have been compensated up to now as well as the company’s hiring practices. As a result, trends regarding attrition have been improving, so this should bring stability to this side of the business for ATI.

The other area that needs prompt improvement is with respect to visit volume from patients. Here, management has overhauled its sales strategy with the objective to drive more referrals through a more hands-on role from the clinics. Through relationship building on the front-end with huge amounts of customers, the scope is certainly there to focus more on this area which should pay dividends in the long run. Apart from the core sales staff, the in-clinic leadership personnel, however, needs to be tactful with how this new strategy is implemented. Why? Because patients want to get their rehab issues resolved as soon as possible so they do not need more care.

This is essentially the problem in this industry in that a life-long customer does not exist. Furthermore, if the physio and respective business has integrity, their aim also always has to be that the patient leaves the clinic as soon as possible. This is how you really get referrals in the long run which is a direct result of the patient receiving more value than what the competition has to offer. Nevertheless, with more stock being issued recently alongside more refinancing and heavy investment on the sales side, the lines can get blurred very quickly here. ATI is not selling a product or service that is original, so it needs to make sure that it never puts the cart before the horse in terms of making the business profitable. The customer always coming first is the surefire way of increasing visit volumes at the clinics.

From an investor’s standpoint, the real calling card is the company’s valuation. The forward sales multiple at present comes in at 0.52, whereas the sector median’s sales multiple comes in at 5.87. Suffice it to say, even if the sector is overpriced at present from a sales standpoint, there is a far higher probability of ATI’s multiple moving northward towards even a discounted industry mean rather than the other way around.

In saying this, the company has to at least hit its subdued EBITDA guidance this year to keep the market interested. The recent refinancing due to higher labor and clinic costs this year has bought the company time in the short term. Plenty of risk remains here, however, especially when you see the value of goodwill and intangibles on the balance sheet. These will be the first items to be written down if indeed consensus numbers are not being met going forward.

Therefore, to sum up, ATI Physical Therapy continues to have it all to do. The big external risk here would be a return of a coronavirus variant as this would impact visits in a big way once more. The market though (through that recent bottom on the technical chart) has given the stock a reprieve. Let’s see if ATI can take advantage. We look forward to continued coverage.