2023-03-15 17:34:59 ET
Summary
- We saw our previous prediction of municipal contracts helping cushion DocGo's revenue (absent of the Covid test) work out for its full year of 2022.
- The technological advantage in operations and low debt burden combined with ample liquidity put the company on a strong footing for future growth.
- We believe its topline revenue has the potential to grow at a fast pace, with backlog coming online in late 2023 and more pending contracts potentially being rewarding.
Investment Thesis
Our previous "strong buy" recommendation of the stock resulted in almost 50% returns at its highs in about three months. We revisited the thesis by covering DocGo's (DCGO) latest earnings report, concluding our previous projection was on track, and made slight updates on the assessment; ultimately recommending it as a buy.
Review of the Latest Earnings And Our Previous Thesis
In the latest earnings report, DocGo reported fourth-quarter EPS of $0.050, better than the analyst estimate of $0.049. Revenue for the quarter came in at $108.8M versus the consensus estimate of $103.82M. Here we summarize our previous theses analyzing DocGo's business strengths and weaknesses with a forward-looking assessment . We will review if they still hold for the company.
Previously, we identified that DocGo's technological advantage was in its cost and expense control. Although its cost of revenue and operating expenses have increased in absolute value terms, they have declined to their lowest levels as percentages to revenue in a year. In a high-inflation environment, this is not common among most companies, especially in the healthcare industry, where labor and equipment costs tend to have higher stickiness.
Even with the decline of the overall cost and expense compared to revenue, the company continued to spend on its research and development, with its ratio as a percentage of operating expenses reaching the highest since it went public via IPO.
This advantage should continue to be a strong point for the company going forward. More diverse data and growing networks will continue optimizing its algorithms' prediction of the operational cost and resource allocation (see our previous article for more details).
On the growth front, its full-year revenue and gross profits are both higher YoY, even though it lost $49 million in non-recurring Covid testing revenue in Q4 compared to Q4 2021. This is also what we previously predicted almost 6 months ago: although Covid testing contributed significantly to its revenue in 2021, DocGo has firm footing from its municipal contracts to have a smooth transition when losing that part of its revenue. In particular, its full-year revenue of 2022 was 38% higher YoY, and its gross profit was 35% in 2022 compared to 34% in 2021.
DocGo also made significant investments in mergers and acquisitions. Its full-year investment in the acquisition of businesses is $32.9 million, which was 20% of cash at the end of the period. It still has ample liquidity as its cash at hand at the end of the period is still at about $164 million. Given DocGo's ambitious plan to penetrate its potential market and acquisition being one of its most effective strategies to gain footing, the management has made appropriate calculations in terms of spending and liquidity. And its current debt-to-equity ratio is 7%, and its debt-to-EBITDA ratio is 62% on a TTM basis. The company's advantage of a low debt burden in a higher interest rate environment still holds, as we previously alluded to.
Moreover, its cash conversion cycle is going strong. With its account receivable rising faster than its account payable, the difference between them has reached its highest level in two years.
We have become more optimistic about the company compared to our previous assessment. The company has proven it is able to manage substantial expansion while keeping liquidity and debt in check without dramatically increasing costs and expenses. This is crucial for the company's upside and will be tested over and again by the market. But for now, we think the management has done a good job.
Forward-Looking
Most of its margins have come down compared to Q1 of 2022. It is primarily due to its revenue being lower for the same period. They are still on a long-term upward trend in a YoY comparison.
DocGo did experience a slower sales pace in Q4, with its days of sales outstanding at about 76 days compared to the faster pace of 48 days in Q4 2021. However, this is still within its norm as the pace in 2019 was also 76 days. We see it as a normalization as society recovers from the intense period brought on by Covid. Going forward, will its fast pace growth continue?
We see a lot of potential unfolding for DocGo. The company's collaboration with Dollar General ( DG ) is right on schedule in its roll-out. This offering is currently available in part of Tennessee's Dollar General locations, with its telehealth widely available in that state. And it reported in its earnings release that it has a $180 million backlog spread over three years to be fully rolled out by 2H of the year.
For its medium-term growth, DocGo has 34 active RFP submissions pending awards totaling over $1 billion in aggregate contract value. Pending means, they may or may not get the contract. So if we assume they get half of it and the contracts spread out by 3 years, as it indicates the current backlog is about 3 years, then that will be about $166 million a year. This is about 37% added revenue per annum. Investors can make their own assumptions in this calculation, but the potential is there to the upside.
Weaknesses & Risks
For DocGo's near-term risks, we continue paying attention to how its expansion pace matches its potential and sustainability. The company stated in the earnings call that it recently gained traction in Connecticut, Chicago, and Southern California. How it will maintain traction without overspending will be the key. Moreover, we noticed there is an item on its operating cash flow as "Bad Debt Expenses", which was due to uncollectible account receivables of about $4 million. It is minimal compared to its Q4 total account receivable of $103 million. But is this due to the fast expansion pace that some accounts are set up in a rush, or because of the risks in getting to know the new service areas and the clients? We will keep an eye on it.
Also, we are unsure why the management didn't give many updates on its municipal contracts' current state and outlook during the earnings call. We understand some of them are still in the bidding, but with current contracts, there should also be new developments. The company's revenue is concentrated on local municipal contracts, such as New York City's refugee program. These contracts give it a cushion and growth buffer with multi-year cash flow visibility. We see continued progress on this front from its 10K, such as acquiring Government Medical Services, LLC ("GMS"), which helps the company improve access to municipal contracts. But overall, there is a risk that local governments' spending is not being maintained at a specific level due to the uncertain economic outlook. However, we don't see any indication of such yet. Even if the economy slips into a mild recession, it shouldn't change most municipalities' spending trajectory in health care and social services, as they are especially needed during tough times.
Financial Overview
Valuation
We previously recommended buying at $6.64, and within 3 months, DCGO reached $10.23, gaining by over 50%, and it is still up by about 27% currently. Using our proprietary models, we updated and made another assessment of DocGo's fair value with a ten-year projection forward. We use the cost of equity of 6.82% and WACC of 6.67%. In our bullish case, DocGo is able to grow at a fast pace of 10%-20% for the next seven years in its cash flow and earnings; it was priced at $14.76. In our bearish case, the company maintains steady growth, but the pace not only fluctuates but also has dropped to about half of what is in the bullish case; it was priced at $10.65. In our base case, it has a lesser growth rate for the next three years compared to the bullish case to account for any economic recession, but goes back up to more than 20% growth afterward before moderating it down; it was priced at $12.98. The swing factor between bullish and bearish scenarios is whether the company can keep a healthy growth pace without stretching too thin, and how fast its acceptance could be in a broader medical care practice. In all our cases, the fair value was revised upward by 2-4% compared to our previous estimates. The market price currently is below our bottom assessment. Given the worst-case scenario, we believe the stock has about a 25% upside from here.
Conclusion
Reviewing the latest development of DocGo, we concluded that our previous thesis was on target. The company's growth is healthy and robust, with its advantage in cost efficiency and low debt burden intact. Its expansion pace is sufficiently maintained without jeopardizing long-term growth. The current market price is lower than our bottom estimate, and we recommend a buy with again a double-digit return expectation.
For further details see:
DocGo: Strong Showing Overall With Potential Fast Topline Growth