Medicaid Cuts And Rising Wages Will Erode Margins

Key Takeaways

• Deep dependence on government reimbursement and exposure to regulatory shifts create persistent headwinds for revenue stability and profitability.
  
• Rising labor costs, technological disruption, and industry consolidation collectively threaten margins, contract terms, and long-term earnings growth.
  
• Strong demand for home-based care, strategic payer agreements, operational improvements, expansion initiatives, and improved Medicaid reimbursement position Aveanna for resilient growth and greater profitability.

Catalysts

A diversified home care platform company, provides pediatric and adult healthcare services in the United States.

• Aveanna's long-term reliance on government reimbursement, especially Medicaid, exposes the company to significant downside as states and federal agencies face mounting budgetary pressure and growing political scrutiny. The company is already seeing rate enhancements diminish to low single-digit percentages versus prior double digits, signaling a likely deceleration in top-line growth that will persist or worsen as state budgets tighten, particularly impacting revenues and earnings.
  
• Escalating labor costs, driven by persistent healthcare worker shortages and rising minimum wages, continue to compress Aveanna's operating margins. Even as the company attempts to pass through higher wages to caregivers, there is clear acknowledgment that spread rates are set to normalize well below prior elevated levels, while further wage increases are anticipated to be necessary into next year. This structural cost issue is likely to pressure margins for the foreseeable future and mute earnings growth.
  
• Intensifying regulatory risk threatens both rate stability and operational overhead; the proposed 6.4% cut to Medicare home health rates combined with the looming risk of further Medicaid cost-shifting could trigger abrupt declines in reimbursement for Aveanna's core services, disproportionately impacting net margins and overall profitability given the company's high dependency on these programs.
  
• Technological disruption in healthcare, such as the widespread adoption of automation and AI, risks eroding demand for Aveanna's traditional direct-care staffing model while simultaneously increasing the need for costly investments to modernize operations. If the company fails to keep pace or pivots too slowly, revenues may stagnate or decline as insurers and patients adopt alternative, tech-enabled care pathways.
  
• Consolidation across the payer and provider landscape is rapidly shifting bargaining power away from companies like Aveanna, exposing it to greater risk of unfavorable contract terms, tougher negotiations, and more stringent clinical/outcome expectations. Over time, this trend is likely to result in downward pressure on reimbursement rates, increased administrative burden, and heightened earnings volatility.

Aveanna Healthcare Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Aveanna Healthcare Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Aveanna Healthcare Holdings's revenue will grow by 6.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.9% today to 4.6% in 3 years time.
• The bearish analysts expect earnings to reach $123.2 million (and earnings per share of $0.56) by about September 2028, up from $18.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, down from 92.5x today. This future PE is lower than the current PE for the US Healthcare industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.22%, as per the Simply Wall St company report.

Aveanna Healthcare Holdings Future Earnings Per Share Growth

Risks

• The ongoing aging of the U.S. population and a sustained preference for home-based care are driving strong demand for Aveanna's core services, which is reinforced by management's comments about persistent unmet demand and requests from payers for even more caregiver coverage-signaling potential for continued volume growth and revenue expansion.
  
• Aveanna's successful execution of its preferred payer strategy, with a growing number of agreements with payers who reimburse at higher rates and value-based models, has improved both revenue per patient and margin stability, potentially supporting healthier earnings and a resilient top line.
  
• The company's operational improvements, including technology-driven efficiencies, cost controls, and targeted wage pass-throughs, are supporting expanding gross margins and positive free cash flow, suggesting better long-term net margins and overall financial sustainability.
  
• Strategic acquisitions, notably the integration of Thrive Skilled Pediatric Care and ongoing geographic expansion into new Medicaid states, are contributing to growth and are likely to expand Aveanna's addressable market and earnings capacity if integration and execution continue successfully.
  
• Despite headwinds around Medicaid funding, recent rate increases in multiple states, strong advocacy efforts, and legislative partnerships have positioned Aveanna to secure better reimbursement and cost coverage, which could reduce downside risk to revenues and bolster long-term profitability.

Valuation

• The assumed bearish price target for Aveanna Healthcare Holdings is $6.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Aveanna Healthcare Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.0, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $123.2 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $8.22, the bearish analyst price target of $6.0 is 37.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.