AGL - agilon health Prospects Improve With Efficiency Gains

Summary

• agilon health recently reported its Q4 2022 financial results.
• The firm provides value-based healthcare solutions to seniors in the United States.
• AGL has produced improved unit economics and revenue is growing quickly.
• My outlook on the stock is a Buy at around $25.00 per share.

A Quick Take On agilon health

agilon health ( AGL ) reported its Q4 2022 financial results on March 1, 2023, beating revenue and missing EPS consensus estimates.

The firm provides Medicare Advantage senior patients with health care options.

Investors are pushing the stock up as better unit economics are driving results for its value-based care model.

As such, my outlook on AGL in the near term is a Buy at around $25.00 per share.

Agilon Overview

Long Beach, California-based agilon was founded to develop a capitation Total Care business model to pay physician groups across various U.S. geographies for improving senior patient care while keeping costs under control.

Management is headed by President and CEO Steven Sell, who has been with the firm since 2020 and was previously president, Chairman and CEO of Health Net.

The company pursues relationships with physician groups interested in receiving a per month per member capitation-based payment relationship for Medicare Advantage patients.

AGL has physician groups that serve patients in Medicare Advantage and through its participation in the Center for Medicare & Medicaid Innovation Direct Contracting Model.

Market & Competition

According to a 2017 market research report by LEK Consulting, the U.S. market for Medicare Advantage is advancing toward a 70% penetration rate among seniors by 2040.

This represents an expected average rise of 1.5% per year from 2010 to 2040.

The main drivers for this expected growth are predictability, more benefits, care coordination and lower annual healthcare costs.

Also, the federal government encourages the plan because it focuses on cost trend management and not fee-for-service.

Major competitive or other industry participants include:

• ChenMed

• Oak Street Health ( OSH )

• Optum

• VillageMD

• Local provider networks

• Alignment Health ( ALHC )

agilon's Recent Financial Performance

• Total revenue by quarter has risen per the following chart:

• Medical profit margin by quarter has increased in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have produced the following results:

• Operating income by quarter has trended lower recently:

• Earnings per share (Diluted) have also worsened further into negative territory:

(All data in the above charts is GAAP)

In the past 12 months, AGL's stock price has risen 31.4% vs. that of Alignment Healthcare's drop of 6.5%, as the chart indicates below:

Valuation And Other Metrics For agilon health

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

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be Alignment Healthcare ( ALHC ); shown below is a comparison of their primary valuation metrics:

(Source - Seeking Alpha)

Commentary On agilon health

In its last earnings call (Source - Seeking Alpha), covering Q4 2022's results, management highlighted the success of its value-based care model for patients with diabetes, which affects 30% of the Medicare population in the United States.

The potential benefit of the firm's approach for physicians is that it 'allows them to operate an outcome versus transaction-driven business model.'

Management expects its 2024 Medicare Advantage membership to 'be approximately double the membership in the 2022 period.'

As to its financial results, total revenue rose 49% year-over-year, while medical margin increased sharply to 9% for the quarter.

Selling, G&A as a percentage of total revenue continued its rising trend, while GAAP operating losses worsened sequentially and year-over-year.

For the balance sheet, the firm finished the quarter with $909 million in cash, equivalents and marketable securities and only $43 million in debt.

Over the trailing twelve months, free cash used was $146.2 million, of which capital expenditures accounted for $15.4 million. The company paid $28.4 million in stock-based compensation in the last four quarters.

Looking ahead, management expects adjusted EBITDA in 2023 to be around $82.5 million at the midpoint of the range, while revenue is forecast to be $4.3 billion, representing 60% growth at the midpoint of the range.

Regarding valuation, the market is valuing AGL at a significantly higher valuation than Alignment Healthcare, not surprising given its higher growth rate and lower negative net income margin.

The firm recently announced the acquisition of mphrX for $45 million. The company provides patient data solutions and the integration of its technologies will help agilon onboard new partners and integrate clinical data.

Now that we are getting to the waning of the global pandemic, companies like agilon are producing stronger growth at lower costs which is showing up in its improved medical margin results.

While the firm is generating higher operating losses, investors are pushing the stock up as better unit economics are driving results for its value-based care model.

As such, my outlook on AGL in the near term is a Buy at around $25.00 per share.

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