Collaborative Health Systems Acquisition Will Expand Patient Reach

Key Takeaways

• Strategic acquisitions and network expansion could drive revenue growth and improve EBITDA through increased patient reach and service provision efficiencies.
  
• Focus on technology-enabled care management and full risk arrangements may enhance cost control and boost net margins.
  
• Potential earnings instability and margin compression for Astrana Health due to integration challenges, cost trends, and revenue recognition inconsistencies.

Catalysts

Astrana Health, Inc., Inc., a physician-centric technology-powered healthcare management company, provides medical care services in the United States.

• Astrana Health expects to grow its membership base by organically adding healthcare providers to its network, potentially boosting future revenue through expanded patient reach and service provision.
  
• Increasing its assumption of responsibility for members' total cost of care through full risk arrangements is a strategic move that could improve net margins by enhancing cost control and aligning incentives for cost-efficient care.
  
• The recent acquisition of Collaborative Health Systems aims to expand the provider network and patient base, with an anticipated revenue contribution and eventual breakeven on adjusted EBITDA, indicating potential earnings growth.
  
• Astrana Health's strategic focus on lowering medical cost trends through technology-enabled care management and disease management programs may improve net margins and earnings by curbing excessive costs.
  
• Astrana Health is leveraging its proprietary technology platform to standardize care management, which could drive operating efficiencies and potentially lead to improved net margins.

Astrana Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Astrana Health's revenue will grow by 24.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.6% today to 3.5% in 3 years time.
• Analysts expect earnings to reach $113.9 million (and earnings per share of $2.29) by about January 2028, up from $62.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.0x on those 2028 earnings, up from 24.4x today. This future PE is greater than the current PE for the US Healthcare industry at 23.7x.
• Analysts expect the number of shares outstanding to grow by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.97%, as per the Simply Wall St company report.

Astrana Health Future Earnings Per Share Growth

Risks

• Astrana Health's adjusted EBITDA decreased 13% from the prior year quarter, indicating potential challenges in maintaining consistent earnings growth, which may impact overall profitability.
  
• The shift in earnings cadence due to timing differences related to incentive dollars and ACO reach performance suggests potential inconsistencies in revenue recognition, possibly affecting earnings visibility and predictability.
  
• Higher-than-expected cost trends in the Medicaid book of business could signal difficulties in managing operating costs, potentially compressing net margins.
  
• Integration of the Collaborative Health Systems acquisition is anticipated to negatively impact adjusted EBITDA by approximately $4 million in Q4, highlighting acquisition integration risks that could dilute short-term earnings.
  
• Uncertainty in medical cost trends, particularly with Medicaid redetermination issues, creates risk in controlling future cost patterns, which can affect earnings consistency and financial stability.

Valuation

• The analysts have a consensus price target of $64.5 for Astrana Health based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $86.0, and the most bearish reporting a price target of just $41.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.3 billion, earnings will come to $113.9 million, and it would be trading on a PE ratio of 33.0x, assuming you use a discount rate of 6.0%.
• Given the current share price of $31.0, the analyst's price target of $64.5 is 51.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.