PINC - Premier: Disappointing Guidance Paints A Bleak Picture

2023-08-05 11:28:33 ET

Summary

• Premier Inc. has experienced a decline in share price and revised its guidance downwards, leading to concerns about future performance.
• The company recently divested its non-healthcare GPO operations for $800 million in cash, which is seen as a positive move to raise capital and handle upcoming debts.
• Despite strong margins and a relatively low net debt, Premier Inc. is still trading above its intrinsic value, making it unappealing for investors.

Investment Outline

The history of Premier Inc ( PINC ) doesn't go that far back as it was founded in 2013. This hasn't meant that PINC hasn't been able to grow substantially and the market cap right now sits at $3.3 billion even after the share price has declined significantly over the last 12 months, down 27%.

I think it is justified to be very worried about the future performance of PINC right now as the company quite recently revised its guidance downwards and this resulted in a big drop back in May. We are still a few weeks out until the next report comes and I doubt we will see any news appearing that would make PINC a buy right now for investors. Some of the reason that the company cited for the revised guidance was a labor shortage and the challenges that come with that, often resulting in lacking expansion possibilities. But rising interest rates are also digging into earnings for PINC. Long-term I don’t think we will see significant momentum added to the EPS. The company did buy back some shares between 2021 and 2022 but I think that dilution might be on the table if rates persist and PINC experience struggles to raise capital and pay down the $355 million of short-term debt. I think that PINC doesn't offer enough incentives to buy and it will be a hold from me instead.

Recent Developments

In recent news from PINC, we saw the company announce the divestiture of the non-healthcare GPO operations for around $800 million in cash. The news came on June 14 and the share price did recover quite well since then as the market saw the news as something positive and a way for PINC to raise capital and efficiency handle the upcoming debts that are maturing.

The CEO Michael J. Alkire had the following to say about the transaction and divestiture, “We are excited to enhance our focus on our member services and core healthcare businesses as we continue executing our strategies to drive sustainable, long-term growth. At the same time, we are evaluating the highest return opportunities for deploying the proceeds from this transaction, including the potential to accelerate the return of capital to stockholders”.

It seems that PINC is confirming that the market is very difficult to operate in and the best course of action is to slim down the operations and focus on what is working very well already. I think that the coming Q4 FY2023 report won't show a significant top and bottom line increase because of this. The only improvement we might see is the higher cash position that PINC now has. What I want this eventually to be turned into is funds for acquisitions.

Where PINC has some positives is its strong financial position at least. The cash flows from operations reached $332 million and the cash and cash equivalents are at nearly $900 million now after the transaction and divestiture.

Margins

PINC displays quite clearly right now that solid margins aren't the only thing to justify a higher valuation. If the company is guiding for struggling times then the valuation will come down. Just looking at the margins of PINC they seem fantastic with the gross margins at 66% and the FCF margin at 24%. But as higher interest rates are digging into earnings I think a suppressed valuation will persist for as long as rates remain high. When we look at the long-term growth of PINC however it becomes visible that it hasn't had such strong momentum. Over the last 10 years, the revenues have compounded at an annual rate of 5.02%. This isn't enough to make a 3 - 4x sales multiple make sense, which the sector has.

Valuation

The addition of around $800 million from the divesture has significantly made PINC have a higher intrinsic value. With my model, I am predicting a 5% terminal growth rate to the FCF which seems like a reasonable amount as the company is also guided to slowing growth. This also has me applying an 8% discount rate which gives me an adequate margin of safety here I think. Despite all this though PINC is still trading above what I think is the intrinsic value of the business, which came out to be $18 per share. The relatively low net debt of $400 million does signify stability and a secure balance sheet, but the lacking growth makes the company trade at a lower multiple, as it should in my opinion. Given that it is trading above the intrinsic value I won't be rating it a buy either.

Risks

The downgrade guidance for 2023 had the market disappointed in the business and resulted in the severed share price decrease too. This observation from the management signals that both enterprises are currently experiencing lower-than-expected performance levels. As a result, these revisions not only emphasize the existing uncertainties in the investment discussion regarding PINC but also shed light on the potential risks that the company is confronting in the immediate future.

The downward adjustments in performance expectations for both businesses could point to broader industry challenges or market dynamics impacting their operations. This raises questions about the underlying factors driving these underperformance trends. It could be tied to shifts in consumer behavior, regulatory changes, supply chain disruptions, or other external factors that are affecting the business's ability to generate anticipated results.

Investor Takeaway

Premier hasn't been operating for that long but has still grown its margins to a fantastic state which I think is holding up the valuation right now as the management revised guidance down. With a pessimistic outlook for the year by the management I don’t think there is anything here that looks appealing. Investing right now seems to offer lackluster returns and it's better to wait and hold off until PINC has come out of the clearing and once again is on its growth trajectory. You might lose out on some potential returns, but I view the lesser risk you take on as sufficient in that trade-off. As a result of my views on the business, I will be rating them a hold for now.

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