Surgery Partners (SGRY): A Strategic Buy in a Sector on the Cusp of a Margin-Driven Recovery

The surgical services sector is at a pivotal inflection point, marked by a confluence of structural shifts and cyclical recovery dynamics. As healthcare delivery evolves toward cost-efficient, outpatient-centric models, companies like Surgery Partners (SGRY) are uniquely positioned to capitalize on these trends. With a strategic focus on ambulatory surgery centers (ASCs), margin optimization, and managed care alignment, SGRY exemplifies the intersection of sector resilience and long-term growth potential. This analysis argues that SGRY is a compelling investment opportunity, underpinned by its ability to navigate sector-specific challenges while leveraging the tailwinds of a margin-driven recovery.

Sector Cyclical Turnaround: The Rise of Ambulatory Surgery and Managed Care

The surgical services sector is undergoing a profound transformation, driven by the migration of procedures from inpatient to outpatient settings. Ambulatory surgery centers (ASCs) have emerged as a dominant force, with U.S. industry revenue projected to grow from $45.5 billion in 2023 to nearly $70 billion by 2030. This shift is fueled by three key factors: payer incentives for cost containment, technological advancements enabling complex procedures in outpatient settings, and patient demand for convenience and lower costs.

Managed care's expanding role further amplifies these dynamics. The dually eligible population enrolled in managed care is expected to grow at a 6% compound annual growth rate (CAGR) from 2023 to 2028, while Medicaid and Medicare reimbursement pressures persist. However, the sector is showing signs of margin recovery. By mid-2025, hospital operating margins had rebounded to near or above 3%, up from mid-1% in 2024. This improvement is driven by the scalability of ASCs, which maintain EBITDA margins of 20% to 30% despite lower reimbursement rates compared to hospital outpatient departments.

Surgery Partners: Strategic Execution in a Fragmented Market

Surgery Partners (SGRY) has emerged as a leader in this evolving landscape, leveraging its scale, operational discipline, and strategic agility. The company's third-quarter 2025 results underscore its momentum: revenue rose 6.6% year-over-year to $821.5 million, with adjusted EBITDA increasing 6.1% to $136.4 million. These gains reflect a 6.3% rise in same-facility revenues and a 2.1% increase in surgical cases, driven by high-acuity specialties like orthopedics and gastrointestinal procedures.

SGRY's growth strategy is anchored in three pillars: organic expansion, margin improvement, and M&A-driven scale. The company has invested $66 million in 2025 to add eight surgical facilities at an effective multiple under 8x adjusted EBITDA, while also deploying $71 million in M&A and divesting non-core assets to optimize its portfolio. Notably, SGRY has acquired 74 surgical robots in Q3 2025, enhancing its capacity to perform complex outpatient procedures. These investments align with sector trends, as ASCs increasingly handle higher-acuity cases such as total joint replacements and spine surgeries.

Managed Care Alignment and Long-Term Growth Catalysts

SGRY's strategic alignment with managed care dynamics is a critical differentiator. The company has secured over 99% of its 2025 contractual rates, with Medicare rate increases of approximately 3% providing visibility into revenue stability. This is particularly significant as managed care plans face cost pressures from the Inflation Reduction Act (IRA), which has constrained pharmacy services and Part D reimbursements. SGRY's disciplined approach to payer mix-50.6% of revenues now derived from commercial payers-ensures resilience against Medicaid redeterminations and rate revalidation delays.

Long-term growth is further bolstered by SGRY's focus on de novo facility development and physician integration. The company has nine ASCs under construction and has hired over 500 new physicians and staff in 2025. These initiatives address sector-wide challenges such as anesthesia shortages and staffing constraints, while also capturing the growing demand for outpatient orthopedic procedures. For instance, total joint surgeries at SGRY surged 50% year-to-date in 2025, reflecting the shift to outpatient orthopedics.

Navigating Challenges and Capitalizing on Opportunities

Despite its strengths, SGRY faces headwinds, including rising drug costs, labor shortages, and near-term volume pressures. The company has revised its 2025 guidance to $3.275–$3.30 billion in revenue and $535–$540 million in adjusted EBITDA, reflecting delayed capital deployment and softer commercial volumes. However, these adjustments highlight SGRY's proactive risk management. By selectively divesting non-core surgical hospitals and reinvesting in high-growth ASCs, the company is prioritizing capital efficiency and long-term value creation.

The broader sector's trajectory also supports SGRY's outlook. Outpatient surgical volumes are projected to grow by 20% over the next decade, while specialty pharmacy revenue-closely tied to ASCs-will expand at an 8% CAGR through 2028. SGRY's strategic partnerships with physician groups and health systems further position it to benefit from the industry's shift toward integrated care delivery.

Conclusion: A Compelling Investment Thesis

Surgery Partners (SGRY) embodies the intersection of sector resilience and strategic innovation. Its ability to navigate margin pressures through operational efficiency, M&A, and managed care alignment positions it as a leader in a sector poised for sustained growth. While near-term challenges persist, SGRY's disciplined capital deployment, focus on high-acuity outpatient procedures, and alignment with macro trends make it a compelling buy for investors seeking exposure to a margin-driven recovery in surgical services.