AMEH - Apollo Medical Holdings: The Future Is Bright But Valuation Is Too High

Summary

• Apollo Medical Holdings, Inc. has had a good 2022 so far and managed to make some good acquisitions to boost its presence in new markets.
• The assets the company holds greatly outweigh the liabilities and the fear of defaulting on debt is insignificant.
• Despite the positive trends for the company, the current valuation is too high to buy at and investors are better off holding shares instead.

Investment Summary

Apollo Medical Holdings Inc ( AMEH ) is a growing company that saw impressive top-line growth in the third quarter of 2022 which made the management revise their guidance upwards. Major announcements of accusations further help an investment case into the company. Apollo has managed to make great steps in solidifying their market share through partnerships with larger companies in the industry.

But AMEH stock's valuation right now is too high to recommend a buy. Instead, holding shares seems to be the best and possibly adding if the valuation compresses to multiples more in line with the sector.

Company Overview

Apollo Medical Holdings Inc. is a healthcare management company that provides integrated healthcare services through its affiliated medical groups and healthcare facilities in the United States. The company was founded in 2001 and is headquartered in Alhambra, California.

The company operates through two segments, Integrated Healthcare, and Medical Pharmacy. The Integrated Healthcare segment provides coordinated, value-based care services to patients through its medical groups, including primary care, specialty care, and hospitalist services. The Medical Pharmacy segment operates a full-service pharmacy that provides medication management services to patients with complex medical conditions.

Apollo Medical Holdings' mission is to provide high-quality, affordable healthcare services to underserved communities. The company's integrated approach to healthcare delivery focuses on improving patient outcomes, reducing costs, and enhancing the overall patient experience. With a commitment to innovation and excellence, Apollo Medical Holdings is positioned to continue its growth and expansion in the dynamic and evolving healthcare industry.

Revenue Breakdown

Looking at the revenues Apollo Medical Holdings are pulling they have seen a drastic increase over the last year. In the third quarter of 2022 for example the top line increased by 40% and ended up being $410 million. But that's about where the impressive points stop. The bottom line didn't see the same increase. Instead, the EPS fell YoY by 32%.

Despite the EPS falling the management remains very optimistic about the outlook for the company and raised the guidance for the full year. The revenues were revised to about 2.7% higher whilst the net income was revised to 17% higher indicating that the management is confident in their ability to raise the margins substantially. If net income comes in at the higher end of the guidance, it would result in a net margin of just over 6%.

Looking at what might have caused this correction in the outlook, the organic membership growth the company experienced might be the reason. Pair that with higher participation in the value-based Medicare fee-for-service model Apollo has. Comparing the third quarter of 2022 to the same in 2021, the fee-for-service increased by 77% and generated almost $13 million in revenues. The report was pleasing and there were some very positive trends to be seen as well. The optimism I have is also shared with the CEO as he reiterated that the company had a strong quarter and expects a very good year of growth. The CEO Brandon Sim said the following “Due to the strong results generated in the first three quarters of the year, we are pleased to be raising our annual guidance ranges for revenue, net income, and EBITDA, and expect to end 2022 on a strong note”.

Market Tailwinds

In the third quarter of 2022, the company managed to complete the acquisition of AAMG and VOMG in October. This greatly improves the presence that Apollo will have in the San Francisco Bay Area. This market is great to get exposure to as it exposes the company to a population that will be able to widely utilize the services that the company provides. This acquisition also brings in another 15.000 managed lives to Apollo. But the company also takes on the entire financial responsibility of a patient care continuum and enables Apollo to recognize a larger percentage of the premium dollar as revenues for members under risk management.

Besides this acquisition, the company also got exposure to both Nevada and Texas as they bought Valley Oaks Medical Group. These two announcements will become great boosters for the revenues of Apollo and I expect to continue seeing top-line growth in the coming years thanks to this. As long as Apollo is able to make these important and profitable acquisitions, I think the momentum can continue and investors might be pleased with the results.

The Company's Profitability

Something that really caught my eye in the third quarter results was the revised guidance, more specifically the net income revised higher. If the estimates came true, the net margin would be around 6%.

The company has so far done a pretty good job leveraging the assets they hold and investing back into itself with acquisitions that help boost its network. Looking back on the last 12 months the company had an ROTC of 8% and a ROTA of 6.9%. I will be watching the ROTA very carefully over the next several quarters given the news of the acquisition the company made. Looking at the balance sheet the company has a large cash position right now and I think there is more room for accusations in the future. With $180 million in cash, it's down by 29% compared to a year prior. This doesn't have me worried as the company still holds more than 3x more assets than liabilities right now.

Even though the previous results are impressive to the company, the important part is looking ahead and making guesses about what the future might hold. In the case of Apollo, they are making moves to secure their market share by acquiring companies and starting importantly with major healthcare companies like Cigna ( CI ) or Elevance Health ( ELV ).

Risks

The healthcare sector is full of risky investments but I don't think Apollo is one of them, at least not as much as biopharma companies for example. But having that said there are things to be aware of when investing in Apollo. As a holdings company, they make a large portion of its revenues by acquiring companies and expanding the platform that Apollo already has. They partner up with larger companies too. The risk I see is that larger companies like Cigna or Elevance might want to develop their own platform and move away from partnerships with companies like Apollo. But I think there is a slim chance for this happening given the proven track record that Apollo has of patient satisfaction.

Valuation And Conclusion

In an increasingly challenging market environment where inflation still is relevant and interest rates have seen the fastest increase in decades, you don't want to be stuck with a bad investment. Right now Apollo is growing fast which can be seen by its valuation. Right now the company has a forward p/e of 33. I think that even though there are major tailwinds ahead for AMEH, I don't want to pay this much of a premium in this market. But if you look at the price/cash flow, it's negative right now, but looking forward it's sitting at 24. This is also in my opinion too high to pay right now.

The company also doesn't have a dividend for investors. All these negatives might make you think you should never invest in the business at all. But I think, given the impressive acquisitions the company has made in the last quarter and the realistic plan they have put forth, a hold for the company right now seems quite fair. The price is too high right now even though it's fallen a fair bit from the 52-week high of $59.

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