2023-06-09 13:40:55 ET
Summary
- Cano Health is a beaten-down Health Care Facilities name with a concerning capital position.
- Free cash flow is expected to turn positive, however, and an important shareholder meeting could move the stock later this month.
- I have a buy rating for Cano Health on valuation and note important technical levels to monitor.
Health Care stocks performed well relative to the broad market in 2022. This year has been a different story, though. The Health Care Select Sector SPDR® Fund ETF (XLV) has underperformed the S&P 500 (SP500) by about 16 percentage points YTD. While the focus is often on the large caps like UnitedHealth Group (UNH), Eli Lilly (LLY), and Johnson & Johnson (JNJ), let's dig into a troubled small cap.
I have a speculative Buy rating on shares of Cano Health, Inc. (CANO) and investors should be on guard for volatility during the middle of this month.
Health Care Out of Relative Favor in 2023
According to Bank of America Global Research, CANO is a clinic-based primary care provider that differentiates itself by its focus on value-based care. By taking responsibility for all patient-related medical costs, CANO is incentivized to focus on whole-patient health and value, rather than maximizing visit volumes. Using its technology platform, high-value referral networks, and clinical expertise, Cano Health can close gaps in care, improve outcomes, and save money for the system while offering a greater suite of benefits to aligned members.
The $712 million market cap Health Care Facilities industry company within the Health Care sector has negative trailing 12-month GAAP earnings and does not pay a dividend, according to The Wall Street Journal. The stock has a high 14.5% short interest.
A month ago, CANO reported mixed Q1 numbers across its key metrics. While EPS verified at -$0.12, $0.04 better than estimates, along with a topline beat and guidance increase, the big issue is the company's liquidity position. As of the end of the quarter, liquidity stood at just $152 million, allowing just a small window to achieve profitability.
Still, CANO's cash flow was higher on a year-on-year basis, even with an uptick in interest expense. It is key for investors to monitor trends in its core Medicare business to improve its cash position. There was some good news in April when the firm announced it was opening three new centers in Florida, but CANO must be careful with respect to its capex cash outlays.
On valuation , analysts at BofA see earnings continuing to be in the red through 2025. Negative EPS figures are also shown via the Bloomberg consensus outlook, though its numbers are slightly less downbeat - particularly for 2023. No dividends are expected to be paid on this small and struggling Healthcare name, but free cash flow is forecast to turn positive in the out year. What's more, the firm's EV/EBITDA ratio should turn lower - below that of the broad market average over the coming quarters.
CANO: Earnings, Valuation, Free Cash Flow Forecasts
Given the risky outlook but improving cash flow trend, pricing Cano Health shares is tricky. If we assume the worth of the firm is about 0.5x 2023 sales, then its market cap should be near $1.6 billion. That would imply a stock price above twice where it is today.
CANO: No Profitability, But a Low Market Value
Seeking Alpha
Cano: 2023 Guidance Increased in May
Looking ahead, corporate event data provided by Wall Street Horizon shows an unconfirmed Q2 2023 earnings date of Wednesday, August 9 AMC. Before that, though, there's a key shareholders' meeting. Following the company separating its Chairman and CEO roles and with three former board members calling for CEO Marlow Hernandez to be replaced at the upcoming gathering, volatility could rise heading into next Thursday.
Corporate Event Risk Calendar
The Options Angle
Digging into the Q2 earnings report and its expectations, data from Option Research & Technology Services ((ORATS)) show a consensus EPS forecast of -$0.10 which would be a decline from -$0.03 of per-share losses reported in the same quarter a year ago. Despite a pair of recent beats, CANO stock has traded lower post-earnings this year.
This time around, the options market has priced in a high 15.7% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the August report. Given extreme implied volatility-north of 160% right now-I indeed expect a massive move by then, so be wary about shorting the premium here.
CANO: Major Volatility Expected, Investors Should Take Caution
The Technical Take
With a valuation that I find significantly higher than the current market price, the chart is less sanguine. Notice in the graph below that CANO is consolidating after a massive plunge from October last year through year-end 2022. While the stock notched an all-time low of $0.76 intraday in late April, big volume came into the name the following session.
But I still see the $0.90 to $0.95 range as key support for CANO, while a downtrend resistance line comes into play around $1.45. With a bearish falling 200-day moving average, the bears are in control, but a breakout above $1.60 would help support a further upside move to perhaps near $3. There is an old gap from last November that could be filled.
CANO: Bearish Descending Triangle, Watching $1.60
The Bottom Line
Cano Health, Inc. is a high-volatility, speculative play, but I think being long into the upcoming shareholders' meeting and August earnings release could work based on the low valuation and potential chart setup if we get a breakout.
For further details see:
Cano Health: Key Shareholder Meeting Looms, Stock Undervalued But Volatile