AHCO - AdaptHealth Needs To Resolve Internal Issues For A Better 2024

2023-12-22 18:10:34 ET

Summary

• AdaptHealth Corp. sells and rents medical equipment and supplies in the United States.
• The global home medical equipment market is expected to reach $56.5 billion by 2027, driven by an aging population and desire to age in place.
• AdaptHealth's financial trends have been mixed, with fluctuating operating income and a sharp drop in earnings per share in Q3 2023 due to a non-cash goodwill impairment charge.
• Given various uncertainties for AdaptHealth Corp., my outlook for the near term is to Hold.

A Quick Take On AdaptHealth

AdaptHealth Corp. ( AHCO ) sells and rents medical equipment and provides supplies to patients in the United States.

With a recent strong downgrade of AHCO to underperform by BofA for numerous reasons, I see no compelling case for immediate upside until the company resolves its various internal issues.

My outlook on AHCO is to Hold.

AdaptHealth Overview And Market

Plymouth Meeting, Pennsylvania-based AdaptHealth, operates as a full-service home medical equipment company with hundreds of rental and sales locations in 47 U.S. states.

The firm is headed by interim CEO Richard Barasch, who assumed the post in September after the company ended its employment agreement with then-incoming CEO Crispin Teufel, who was sued by his former employer Linde to protect potentially confidential or proprietary information.

The company’s primary offerings include the equipment and supplies for the following:

• Respiratory therapy

• Sleep therapy

• Diabetes

• Breast pumps & supplies

• Incontinence

• Orthotics

• Rehab

• Pharmacy

• Additional products.

According to a 2020 market research report by Allied Market Research, the global home medical equipment market was an estimated $30.5 billion in 2019 and is forecasted to reach $56.5 billion by 2027.

This represents a forecast CAGR (Compound Annual Growth Rate) of 6.1% from 2020 to 2027.

The main drivers for this expected growth are a growing incidence of chronic diseases among an aging U.S. and global population and an increasing desire to "age in place" by patients. Additionally, providers and insurers are seeing reduced costs combined with technological innovations as adding to demand. However, there are concerns that relate to patient safety in using devices and products without direct medical supervision.

The chart below shows the expected evolution of the home medical equipment market by functionality from 2019 to 2027:

Major vendors that provide competitive services include:

• Boston Scientific

• Johnson & Johnson

• Medtronic

• Becton, Dickinson

• Cardinal Health

• Baxter International

• Halyard Health

• 3M Company

• Philips

• Sunrise Medical

• Abbott Laboratories

• GE Company

• Convatec Group.

AdaptHealth’s Recent Financial Trends

Total revenue by quarter (blue columns) has risen, although at a slower rate than in previous years; Operating income by quarter (red line) has fluctuated within a range:

Gross profit margin by quarter (green line) has trended lower, likely due to higher costs with its Humana contract; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have moved slightly higher in recent quarters due to a modest increase in costs.

Earnings per share (Diluted) have dropped sharply into negative territory in Q3 2023 due to a $512 million non-cash pre-tax charge from impairment to goodwill, which it calculates once per year.

(All data in the above charts is GAAP.)

In the past 12 months, AHCO’s stock price has fallen 63.5%, per the chart below:

For balance sheet results, the firm ended the quarter with $62.5 million in cash, equivalents and trading asset securities and $2.2 billion in total debt, of which $40.0 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $30.6 million, during which capital expenditures were a hefty $391.7 million. The company paid $22.9 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For AdaptHealth

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Commentary On AdaptHealth

In its most recent earnings call (Source - Seeking Alpha ), management’s prepared remarks highlighted its strong relationship with Humana but also said that it ‘underestimated the size and complexity of the patient transition process’, with onboarding taking longer than expected, hurting its CAP revenues from the Humana contract.

The firm is also actively searching for a permanent CEO and has a goal of filling the position by the end of 2023.

Notably, the company is not yet seeing any impact on its sleep product line from the increasing use of GLP-1 drugs for obesity, and management thinks that the sleep market may grow due to increasing awareness of obstructive sleep apnea as a result of the publicity about GLP-1s. Time will tell.

AHCO is also focusing its efforts on its government business opportunities, especially for glucose monitors and pumps, which it believes is "large and growing."

Analysts questioned the leadership about the Humana contract, margin guidance and its diabetes segment.

Management said the Humana contract is currently delayed in terms of implementation but believes that once they can finish operational changes, the contract can resume as planned in early 2024.

Gross margin in Q4 is expected to increase due to seasonal factors where patients tend to increase their resupply orders.

For its diabetes segment, the firm is dealing with a shift in channels and believes that its data monitoring capabilities will help better monetize the pharmacy channel.

For the quarter’s results, total revenue rose by 6.3% year-over-year, while gross profit margin slid by 0.8%.

Selling and G&A expenses as a percentage of revenue increased by 0.6% YoY, and operating income fell by 7.0%, likely due in part to increasing costs from the Humana contract.

The company's financial position is only moderate, with some liquidity but substantial debt and moderate free cash flow.

With dropping interest rates, the firm’s interest expense may be reduced in coming quarters depending on market conditions and its ability to refinance or roll over at more favorable rates.

Management intends to continue to reduce its debt leverage ratio to under 3x by the end of 2024.

Looking ahead, full-year 2023 topline revenue guidance expects growth of 6.7% over 2022.

If achieved, this would represent a substantial decline in revenue growth rate versus 2022’s growth rate of 20.5% over 2021.

A potential upside catalyst to the stock could include stronger revenue and profit growth from the Humana contract as it increases patient transitions on a more cost-effective basis.

But, with a recent strong downgrade of AdaptHealth Corp. stock by BofA for numerous reasons, I see no compelling case for immediate upside until the company resolves its various internal issues.

My outlook on AHCO is Hold.

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