SGRY

We rate Surgery Partners, Inc. (SGRY) as a Reduce with a composite score of 43.9/100 at a current price of $15.38. The quantitative profile shows weakness across multiple dimensions, suggesting limited upside potential and elevated risk of underperformance relative to peers over the next 12 months.

The rating is primarily driven by strength in stability (70th percentile) and value (59th percentile), which together account for the majority of the composite score. Offsetting weakness in momentum (37th percentile) and investment (39th percentile) tempers our overall conviction. We assign a No Moat rating (31/100), Medium uncertainty, and Poor capital allocation.

Key items to watch: momentum to confirm whether the current price trend has legs; balance sheet deleveraging progress. Any material change in these dynamics could warrant a reassessment of our rating. The moat trend is stable, which suggests the competitive landscape is stable for now.

Surgery Partners, Inc. holds a top-quartile position (#0 of 50) within the Services sector, based on our composite quantitative scoring across quality, value, momentum, and stability factors. The composite score of 43.9/100 places it at rank #2985 in our full 7,333-stock universe. At $2.8B in market capitalization, Surgery Partners, Inc. is a mid-cap player in the Services space, which limits certain scale advantages but may allow for more agile strategic execution.

Revenue is growing at 8%, though momentum at the 37th percentile suggests the market has not yet fully recognized this trajectory. This potential disconnect between fundamental improvement and market recognition could represent an opportunity for patient investors if the growth trend persists.

The margin cascade tells an important story: gross margins of 70% (+10.4pp vs sector) narrow to operating margins of 11% (+7.1pp vs sector) and net margins of 2.3%, yielding a gross-to-net conversion rate of 3%. The significant margin erosion from gross to net suggests elevated operating expenses, high interest costs, or other structural drags that warrant monitoring.

At a current price of $15.38, Surgery Partners, Inc. is trading near fair value based on current fundamentals. Our value factor score of 59/100 reflects a composite assessment across multiple valuation metrics including price-to-earnings, price-to-book, EV/EBITDA, and price-to-sales ratios relative to both sector peers and the broader market. Valuation metrics are mixed, with no strong signal of mispricing in either direction.

The stock currently trades at a P/E of 26.3x (roughly in line with the sector median of 23.7x), EV/EBITDA of 4.4x (discounted to peers), P/B of 0.6x, P/S of 0.6x. The above-sector P/E multiple suggests the market is pricing in superior growth or quality, which our analysis finds only partially justified by current fundamentals.

We assign a Medium uncertainty rating to Surgery Partners, Inc.. The stock presents a balanced risk profile: significant leverage (153% debt-to-equity) and low beta of 0.68 — while defensive, this may indicate limited upside participation in bull markets. While not risk-free, the core business fundamentals are adequate to withstand moderate economic stress, and the range of potential outcomes around our fair value estimate is manageable.

Specific risk factors that inform our assessment include: significant leverage (153% debt-to-equity); low beta of 0.68 — while defensive, this may indicate limited upside participation in bull markets; the combination of leverage (153% D/E) and thin margins (2.3% net) amplifies downside risk. Each of these factors independently widens the distribution of potential outcomes, and in combination they create a risk profile that demands careful position sizing. The stability factor at the 70th percentile and quality factor at the 41th percentile provide a quantitative summary of the overall risk landscape.

Key risk mitigants include: healthy gross margins of 70% provide a buffer against cost pressures; above-average stability (70th percentile) suggests predictable business dynamics. These factors partially offset the identified risks and provide downside protection in adverse scenarios. On balance, the risk-reward profile is favorable for long-term investors.

We rate Surgery Partners, Inc.'s capital allocation as Poor. Key concerns include low returns on equity (2.4%), elevated leverage (153% D/E), weak asset returns (ROA 1.0%). Exemplary capital allocators generate ROE above 20% and maintain conservative leverage — Surgery Partners, Inc. significantly underperforms these benchmarks, raising questions about management's ability to create shareholder value.

Investors should scrutinize management's reinvestment decisions and balance sheet trajectory before committing capital. Poor capital allocation often compounds over time: overlevered balance sheets limit strategic flexibility, while low returns on capital destroy shareholder value. We would need to see sustained improvement in profitability metrics and balance sheet discipline before considering an upgrade.

In summary, Surgery Partners, Inc. receives a Reduce rating with a composite score of 43.9/100 (rank #2985 of 7,333). Our quantitative framework assigns a No Moat (31/100, trend: stable), Medium uncertainty, and Poor capital allocation. The average factor score across quality, value, momentum, stability, and investment is 49/100.

Our analysis does not support a constructive view on Surgery Partners, Inc. at this time. The combination of limited competitive advantages, medium uncertainty, and poor capital allocation suggests unfavorable risk-reward at current levels. We recommend investors avoid new positions and existing holders consider reducing exposure.