EVH - A First Evaluation On Evolent Health

2023-10-04 15:16:31 ET

Summary

• Evolent Health, Inc., is a mid-cap solutions provider in the healthcare space that made a major acquisition late last year.
• The stock is down some 30% from recent highs despite impressive sales growth and solid analyst firm support.
• Earnings will decline in FY2023 as the company integrates its new operations before rebounding significantly in FY2024.
• Has the stock of Evolent Health dipped into the 'buy zone' yet? An analysis follows in the paragraphs below.

Every solution to every problem is simple. It's the distance between the two where the mystery lies. ”? Derek Landy.

Today, we put a mid-cap solutions provider that serves the healthcare space called Evolent Health, Inc. ( EVH ) i n the spotlight for the first time. The stock is down from its recent highs in spring of this year.

Company Overview:

Evolent Health is based in Arlington, VA and the company is broken into two main divisions: Evolent Health Services, and Clinical Solutions, through which it provides various clinical and administrative solutions to payers and providers in the United States. The stock currently trades just north of $26.00 and sports an approximate market capitalization of $2.9 billion. Evolent's products and platform specialize in providing better health outcomes for people with complex conditions through proven solutions that make health care simpler and more affordable. Most of the company's revenues come from Medicaid and Medicare program providers.

The company expanded its business footprint substantially in November of last year by acquiring the specialty benefit management business of Centene ( CNC ). This transaction was funded via $400 million of cash upfront plus $250 million of newly issued EVH stock based on an issuance price of $29.50 per share. Another potential $150 million payment is due in the first quarter of next year depending on performance of the unit. Evolent's management stated at the time of the purchase that it would be immediately accretive to adj. EBITDA margins and cash flow.

Second Quarter Results:

On August 3rd, Evolent Health posted its second quarter numbers . The company deliver 14 cents a share in non-GAAP profit for the quarter, a penny below expectations. Revenues did rise just over 46% on a year-over-year basis to just over $469 million, $8 million better than the consensus.

Management reiterated its FY2023 outlook, calling for revenues of between $1.935 billion to $1.965 billion and adjusted EBITDA of between $185 million to $200 million. Projected cash allocated for additional software development is budgeting between $35 million to $40 million as well.

The acquisition from Centene resulted in big growth in unique members, which came in at 41.8 million at the end of this quarter compared to 16.3 million in the same period year ago. Total lives on the company's platform also rose to 78.6 million from just 19.4 million in 2Q2022. Adjusted EBITDA rose just under 120% on a year-over-year basis to $47.4 as well.

Analyst Commentary & Balance Sheet:

Since second quarter results hit the wires, BTIG ($45 price target), Piper Sandler ($51 price target) and RBC Capital ($44 price target) have all maintained their Buy ratings on the stock. Morgan Stanley ($36 price target) reissued its Hold rating on EVH.

Approximately seven percent of the stock's outstanding float is currently held short. Several insiders have been frequent and consistent sellers of the stock so far here in 2023. So far this year, they have disposed of north of $25 million shares collectively. There have been no insider purchases in this equity so far in 2023.

The company ended the second quarter of this year with just over $140 million worth of cash and marketable securities on its balance sheet . The company had just under $520 million of net debt at the end of the first half of 2023, which translates into 3.3x LTM Adjusted EBITDA, which is up from 1.6x from the same period a year ago. Thanks largely to the purchase from Centene late last year.

Valuation & Verdict:

Evolent Health made 95 cents a share of profit in FY2022 on $1.35 billion in revenues. The current analyst firm consensus has profit falling to just over 50 cents a share in FY2023 as the company's integrates its recent purchase from Centene, even as sales increase nearly 45%. Earnings growth is projected to return in FY2024 as the company posts 83 cents a share of profit on a 20% rise in sales.

Evolent Health is seeing some impressive sales growth. That said, that does not translate for a compelling case to own the shares at these trading levels despite mostly positive analyst firm coverage of the stock. Profits will drop noticeably this year and the equity trades at over 30 times projected FY2024 non-GAAP EPS. That gives it an inverse P/E yield of 3.3% at a time when 'risk-free' short term treasuries yield 5.5%. Add in a significant amount of insider selling in the shares this year and good slug of debt on the balance sheet, I can find no good reason to recommend Evolent Health, Inc. stock at current trading levels.

A solution is never as easy to find as someone to blame for the problem .”? James Rozoff.

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