2023-08-03 12:40:26 ET
Summary
- Agiliti Inc. has made progress in recovering its bottom line, but 2023 is expected to be a down year compared to 2022.
- The company's revenue mix is well diversified, but the valuation remains above the market, making it a hold rather than a buy.
- AGTI has seen growth in its cash position, but its high net debt/EBITDA ratio and interest expenses are concerns for its financial state.
Investment Outline
The bottom line of Agiliti Inc ( AGTI ) has made decent progress in recovering to the highs it had back in 2021. 2023 is likely to be a down year in comparison to 2022 but I think we are on the way to rebound and as the interest rates hopefully begin to decrease eventually..
Agiliti has been in operation for a very long time and has grown its customer base efficiently. The impacts that Covid-19 had on the business were largely positive as the demand rose and so did the revenues and earnings of it. I don’t think anyone was expecting that a lot of the revenues generated during that market cycle would remain for healthcare companies. But I do think it gave AGTI the capital necessary to invest strongly and continue its long-term upwards trend of growth. The revenue mix is well diversified with the biggest source standing at 39% of the total revenues. I think we need to look at AGTI as a long-term holding but as long as the valuation remains above the market I don’t think the risk-reward is necessarily that great to make it a buy. Until we see either a correction or a much faster pace in revenue growth I will be having AGTI as a hold.
Recent Developments
In terms of company developments like an acquisition or a new clearance or tech being announced AGTI has been quite silent on this front, unfortunately. The most recent and relevant news would be the last earnings report that did show AGTI able to grow despite the revenues growing by 4% if we are excluding the impact that covid revenues had a year prior.
The net income has instead been struggling and this comes with the effect of higher interest rates. AGTI holds corporate debt and as the FED has been increasing the rates so has the expense for AGTI. The TTM Interest expenses are $54 million and this seems to have impacted Q1 2023 EPS negatively by $0.03.
Looking at the financial state of AGTI though I can see clearly that they have made some decent progress in growing the cash position. This seems like a necessary step for them to take given that they saw a leverage increase driven by the last Q4 2022 acquisitions. I think that for the moment AGTI is coming from a pretty risky place given that the net debt/EBITDA is at 4.4 right now using the TTM numbers. That doesn't leave a lot of room for missteps. Perhaps the maturities of the debts are far out, but that still doesn't clear up concerns I have for AGTI.
Looking at the coming quarter which is expected to be on August 8 and I think we might see another QoQ growth for the top and bottom line. This wouldn't necessarily be enough to make the company anything but a hold right now. I still want to see a significant increase in the margins of the business and as long as interest rates remain high I think EPS will be suppressed.
Margins
Margin Profile (Seeking Alpha)
Looking at the margins for AGTI they don’t look that bad in my opinion. Some improvements could happen but the FCF margin for instance is very solid at a 8.2% yield. I think as we eventually see rates decrease the likelihood that AGTI has grown net margins drastically increase. This seems to be the hope of the market right now as AGTI still trades at a p/e of 25, or 22% higher than the sector.
Valuation
DCF Model (My Own Model)
Looking at the DCF model above here that covers AGTI we see that the current price is quite overvalued in comparison to the intrinsic value of the business. I have estimated a 12% growth rate for the FCF which is quite optimistic perhaps, but I think we will see a lot of momentum in the coming years as interest rates hopefully start decreasing. Basing your entire thesis around decreasing seems like risky business and that I why I don’t rate AGTI a buy. I think a hold is a far better and more neutral option to take here. It brings less risk and stress to a portfolio and if AGTI drops in price to a multiple under the sector then it will be easy to pick up some shares on a discount.
Risks
If Agiliti's free cash flow experiences a decline or turns negative, the management will likely resort to further share dilution as they have previously done. Over the period from 2019 up until the latest financial report, the company has witnessed a significant increase in shares outstanding, marking a growth of 33%. While this strategy might provide a short-term solution, it can have long-term repercussions for investors in terms of their compounded returns being compromised and their ownership being diluted.
Shares Outstanding (Macrotrends)
Furthermore, a consistent pattern of share dilution could potentially erode investor confidence and undermine the attractiveness of AGTI's stock price. As shareholders see their ownership diluted over time, they might start to question the management's ability to drive sustainable growth without relying heavily on raising capital through additional share issuances.
Investor Takeaway
AGTI operates in the healthcare services market where it provides healthcare technology management and various services solutions to many companies in the healthcare industry. Operations are in the United States and when the Covid-19 pandemic hit the top and bottom line of AGTI grew quickly. In recent years it has lost some of those gains but the long-term outlook remains positive.
Where my issue lies is the fact the valuation is quite high still and perhaps because of the hopes that AGTI can recover EPS to where it was in 2021. But that is not a bet I am willing to make right now and I think AGTI is far more suitable as a hold rating currently.
For further details see:
Agiliti Inc - Not Quite The Time To Get In Yet