Summary
- Agiliti had a shaky last earnings report as the bottom line decreased by $8 million and made the management revise guidance downwards.
- Shares have continued to be diluted and there is no reason for this to stop it seems.
- The situation presents itself as quite risky which makes me keep a sell rating for the company until clear tailwinds can be seen.
The Investment Thesis
Agiliti Inc ( AGTI ) had a shaky last earnings report as the bottom line took a big hit. The debt levels that the company currently holds are still very high. If trends keep up and operating expenses increase faster than revenues I think the management will continue to dilute shares and hurt investors. Paired with a high-interest environment and no dividend being distributed the situation is too risky and I think a sell rating is suitable for the company at the moment.
Company Overview
Agiliti Inc is a healthcare technology and services company that provides medical equipment management and service solutions to healthcare facilities in the United States. The company was founded in 2018, but has roots dating back to 1933, and is headquartered in Minneapolis, Minnesota.
The company's core business is the rental, sale, and service of medical equipment such as imaging and monitoring devices, surgical equipment, and patient handling equipment. They offer a range of service options, including preventive maintenance, repair, and replacement of equipment, and also provide clinical engineering and asset management services to help healthcare facilities maximize the life and value of their equipment.
Agiliti serves a wide range of healthcare facilities, including hospitals, surgery centers, long-term care facilities, and other healthcare providers. With a focus on customer service and patient safety, Agiliti aims to provide high-quality equipment and service solutions that help healthcare providers deliver exceptional patient care.
Revenue Breakdown
In the latest earnings report that Agiliti Inc provided investors, it could be seen that revenues saw a 3% increase YoY whilst the net income decreased by $8 million down to $2 million in total for the third quarter of 2022. This is quite worrying seeing as the year prior the net income was $9.7 million. Seeing such a move to the downside makes me worried about the management's ability to maintain healthy margins in an increasingly both competitive and challenging industry.
Earnings Highlights (Earnings Report)
This worry is further boosted by the outlook being weaker. in the presentation, the company revised its revenue guidance lower by about 6% from prior guidance. For the full year of 2022, the revenues are expected to come in between $1.1 and $1.12 billion. Pair this with the bottom line consequently seeing a decrease too. The EPS is expected to come in between $0.83 and $0.88 which means Agiliti is trading at around 21 forward p/e. This is a little bit too high to make a case for the company being a steal at these prices. A valuation more in line with the broader sector would put the p/e at 19, meaning there is a downside of 10% from current prices.
Segment Growth (Earnings Report)
But there weren't all negatives from the earnings report. Some segments within the company shined bright still. The Equipment Solutions part saw a 33% increase YoY which helped offset some of the losses in the other segments like Clinical Engineering and Onsite Managed Services. This means that the Equipment Solutions segment might grow to be the largest source of revenues for the company and there are tailwinds to support this like a higher proportion of larger-scale contracts expected to complete in the short term. This would provide meaningful revenue streams for the company as they themselves said they are " well-positioned to weather any macro uncertainty ahead of them". All in all, I think the company managed well in the last quarter, but with guidance revised downwards it has me worried the current valuation is too rich to make an investment case.
Market Tailwinds
The healthcare service market is large and despite that is expected to grow at a good pace all the way until 2027. The CAGR is expected to be 5.3%. This would value the industry at $9.816.85 billion by 2027. Some of the moves I would like to see from Agiliti will be the continuation of securing contracts that will help them keep a steady stream of revenues. But also looking at the way the company manages to offset expenses will be vital. There will be short-term headwinds along the way, and how the management manages to maneuver around them is important. Even though the pandemic lead many healthcare companies to be in large demand, inflation and longer-than-expected times for imports to arrive caused the expenses to increase. This seems to have somewhat stayed as the cost of revenues increased by 3.4%, which was faster than the revenues.
Besides contracts being a tailwind for the company, life expectancy is increasing in the United States. This means that the services that Agiliti Inc provides will be in demand for longer than the years before. But there will also be an increase in the number of people that will need it, as the senior population in the country is estimated to make up a larger proportion the decades previously.
The Company's Profitability
If a company is profitable with the capital it's investing into the company and manages to make a profit from the assets it holds and it can maintain this trend for several years, investors will usually be very happy. Agiliti Inc they have an ROTC of 3.28% and a ROTA of 1.52%. Compare this with the sector median of about -25% for both categories and it seems Agiliti has done a phenomenal job. But as I mentioned previously this profitability might be in danger as the net income has dramatically gone down YoY. If this trend continues I think investors will want to pull out as the management can no longer keep a positive bottom line.
Further arguments that support the trend that the company might not see the same profitability it once had is the interest expenses increasing by 16% YoY. In the last quarter, the company paid $12.5 million in interest. With interest rates expected to stay elevated for quite some time and product expenses still high, there are little few short-term tailwinds for the company. Until a clear trend is visible where both interest rates go down and the operating expenses go down then the current situation seems too risky.
Besides the trends indicating a lower profit margin for the company I also am worried about the debt the company has. Currently, they hold just over $1 billion in long-term debt and $17 million in short-term debt. The cash position can cover the short-term debts but it will only leave $15 million over to tackle the long-term debt. As profits diminish so does the free cash flow. If this goes far enough I think there is a clear risk of shares being diluted which greatly hurts any investor holding shares in the company.
Risks
As with all investments, there are risks that come along. In the case of Agiliti Inc, I think the most important one is that operating expenses increase faster than revenues. If that trend keeps up the bottom line is in danger of turning negative and debt will continue to be a great risk
As mentioned previously, if the free cash flow the company has turns negative or at least moves downwards I think the management won't stop diluting shares as they have already done before. From 2019 until the last report the shares outstanding have increased by 33%. In the long-term, this really hurts investors as the compounded returns and diminished and diluted.
Valuation And Conclusion
With the forward p/e for the company being 21 right now as the EPS has been revised down by the management in the last report, the case for making an investment right now is simply not there. In a high-interest environment where profitability and a large cash position are vital to weather such a storm, I feel like Agiliti is too risky to advise buying right now. Besides the valuation is higher than the sector average of 19, the company doesn't have a dividend and has a noticeable trend of diluting shares.
Price Chart (Seeking Alpha)
If a sector p/e were to be applied to the company the share price would have to drop by around 10% from current levels, which would value Agiliti at $16.15 per share.
The last earnings report didn't bring much to get investors excited about the future for Agiliti as net income drastically decreased. Until the major contracts the management mentioned in the presentation starts to impact the revenues, I believe the best course of action might be to sell shares. I think there is too much risk here as profitability goes down and shares go up.
For further details see:
Agiliti: Bottom Line Declining And No Catalyst In Sight