KR - GoodRx: Taking Drastic Measures

Summary

• Today, we put GoodRx Holdings in the spotlight for the first time.  This healthcare concern has destroyed much shareholder value over the past year.
• However, the company has recently resolved a major dispute and announced a significant restructuring that will reduce its workforce by one sixth.
• Are these major changes enough to turn things around at GoodRx?  An investment analysis follows in the paragraphs below.

The United States was founded by the brightest people in the country - and we haven't seen them since .'' - Gore Vidal

GoodRx Holdings ( GDRX ) is one of the better-known names that came public during the IPO boom from mid-2020 through the end of the summer of 2021. Its commercials have flooded the media landscape. Unfortunately, none of this has led to good returns for shareholders. In fact, this stock has been a dumpster fire since coming public and destroyed billions of shareholder value as the equity plunged deep into 'Busted IPO' territory.

The company recently announced a major restructuring and the stock does seem to be trying to put in a floor. Time to buy the dip or continue to avoid this falling knife? An analysis follows below.

Company Overview:

GoodRx Holdings is based in Santa Monica, California. The company offers information and tools that enable consumers to compare prices and save on their prescription drug purchases in the United States. It does so via a price comparison platform that provides consumers with curated, geographically relevant prescription pricing, and access to negotiated prices through GoodRx codes that are used to save money on prescription. The stock currently trades around five bucks a share and sports an approximate market capitalization of $2 billion.

The stock sank in May when the company announced it had a dispute with Kroger ( KR ) and its pharmacies that impacted the acceptance of discounts for a group of drugs. At the time, leadership stated the issue's impact at ~$30M for the first quarter. This dispute was resolved in August. Due to the dispute, GoodRx saw only 20% of the weekly volume they processed through this grocer in the second quarter. As a result, overall prescription transaction revenue decreased 7% year-over-year in the quarter. An article on Seeking Alpha in late August gave a good explanation around the dispute.

In March of this year, GoodRx purchased the vitaCare prescription services unit from TherapeuticsMD ( TXMD ) for $150 million. The acquisition expanded GoodRx's capabilities but did not add to leadership's long-term guidance.

Second Quarter Results:

On August 8th, the company posted second quarter numbers . GoodRx earned six cents a share on a Non-GAAP basis as revenues rose 8.6% on a year-over-basis to $191.8 million. Both top and bottom-line results nicely exceeded expectations.

Management then adjusted down Q3 sales guidance to approximately $185 million. The consensus was just over $200 million at the time in the analyst community. Leadership also expects Adjusted EBITDA Margin to be approximately 20% in the third quarter which would be down from the 24.6% margins in the second quarter of this year.

Analyst Commentary & Balance Sheet:

The analyst firm community is not sanguine about the company's prospects at the moment. Since second quarter results posted, a dozen analyst firms including Morgan Stanley (MS) and Goldman Sachs (GS) have reissued Hold/Neutral ratings on the stock. Price targets proffered range from $6.50 to $12.00 a share. Only Jefferies (JEF) ($9 price target), Bank of America (BAC) ($13 price target) and Barclays (BCS) ($9 price target) have maintained Buy ratings.

Approximately one out of six outstanding shares are currently held short. One insider sold just over $1.1 million worth of shares on January 3rd of this year. That is the only insider activity in the shares so far in 2022. The company ended the second quarter with approximately $730 million of cash and marketable securities on its balance sheet against just over $650 million of long-term debt.

Verdict:

The current analyst firm consensus has the company earning approximately a quarter a share in FY2022 as revenues rise nearly six percent to $785 million. In FY2023, sales growth is projected to pick up in the low teens with the company earning 33 cents a share. Earnings, before one-time adjustments are likely to be lower in FY2022, due to the severance costs of the recently announced layoffs that will impact one sixth of the company's work force. Earnings for FY2023 probably will bump up a few pennies a share to account for operational savings and improve margins in the coming fiscal year.

Unlike most Busted IPOs I post research on, GoodRx is nicely profitable. This is despite the collapse in its shares over the past year and its reduced third quarter guidance issued in August. At approximately 2.5 times this year's revenues, the shares seem more than reasonably valued if the company can start to deliver against expectations without reducing guidance further.

The shares might be worthy of a small 'watch item' position if that occurs ahead of higher projected revenue growth in FY2023. Investors should also get a new set of updated data points when GoodRx reports third quarter results over the next week. I personally will keep an eye on GDRX but I am not initiating a starter position in this equity until third quarter earnings are posted and we get updated commentary from management.

The most exquisite pleasure in the practice of medicine comes from nudging a layman in the direction of terror, then bringing him back to safety again ."? Kurt Vonnegut

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