Transitioning To Full-Risk Contracts Fuels Revenue Growth And Expands Healthcare Leadership

Key Takeaways

• Transitioning to full-risk arrangements and technological investments aims to boost net margins by aligning costs with reimbursements and enhancing healthcare delivery.
  
• Strategic acquisitions and focus on value-based arrangements are intended to expand market presence and increase membership, driving revenue growth and operational efficiency.
  
• Aggressive expansion and acquisition strategy could strain Astrana Health's operational resources and profitability, with potential for negative short-term financial impacts.

Catalysts

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

• Astrana Health is actively transitioning from partial risk contracts to full-risk arrangements, expected to enhance capitation revenue and drive up profitability through better alignment of costs and reimbursements, thus positively impacting net margins and earnings.
  
• The company's investment in technology and clinical infrastructure is aimed at empowering providers to achieve superior patient outcomes while managing costs efficiently, which could lead to improved net margins through more effective healthcare delivery.
  
• Strategic acquisitions and partnerships, such as the acquisition of Community Family Care and the partnership with Anthem Blue Cross, are intended to broaden Astrana Health's market presence and drive revenue growth by increasing the member base and entering new geographic markets.
  
• Astrana Health’s focus on value-based arrangements and increasing membership in both new and existing geographies positions the company to capture a larger share of healthcare spending, intending to boost revenue growth by attracting and managing more members under its care models.
  
• The company's commitment to delivering sustainable long-term value through organic growth, acquisition strategy, and operational focus is envisioned to fortify its market position and operational efficiency, thereby fostering a conducive environment for revenue expansion and margin enhancement.

Assumptions

• Analysts are assuming Astrana Health's revenue will grow by 19.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.3% today to 4.2% in 3 years time.
• Analysts expect earnings to reach $114.6 million (and earnings per share of $2.35) by about September 2027, up from $68.4 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 34.5x on those 2027 earnings, up from 34.0x today. This future PE is greater than the current PE for the US Healthcare industry at 27.0x.
• Analysts expect the number of shares outstanding to grow by 3.85% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• The acquisition of CHS is expected to run up to a $10 million loss on a standalone basis in 2024, potentially impacting Astrana's net margins and earnings negatively in the short term.
  
• Astrana Health has aggressive expansion plans through acquisitions and partnerships, such as with Anthem Blue Cross and Elation Health, which could strain operational resources and affect profitability if the integration and execution do not go as planned, impacting earnings.
  
• A small uptick in inpatient utilization related to a surge in COVID-19 cases is noted, suggesting potential volatility in costs and margins if unexpected health crises occur, impacting net margins.
  
• The company plans rapid integration of newly acquired businesses with an expected push to breakeven adjusted EBITDA contribution by 2025, which carries execution risk and may affect earnings if synergies do not materialize as expected.
  
• With a significant focus on moving partial risk contracts into full-risk arrangements, there is a financial risk associated with increased responsibility for members’ total costs of care, which could impact revenue and net margins if cost management is not effectively executed.

Valuation

• The analysts have a consensus price target of $61.86 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 $70.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.7 billion, earnings will come to $114.6 million, and it would be trading on a PE ratio of 34.5x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $47.35, the analyst's price target of $61.86 is 23.5% 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.