Tech-enabled Platforms And Fee-For-Service Will Transform Operations

Key Takeaways

• Leveraging technology platforms and strategic divestitures aim to enhance revenue, optimize capital structure, and boost earnings.
  
• Transition to fee-for-service contracts in NEMT and Board enhancements are expected to improve cash flow, execution, and shareholder value.
  
• Unpredictable revenue shifts from Medicaid disruption and healthcare utilization, coupled with financial strain and contract losses, endanger revenue stability and future predictability.

Catalysts

A technology-enabled healthcare services company, provides a suite of integrated supportive care solutions for public and private payors and their members in the United States.

• ModivCare is leveraging technology-enabled platforms across NEMT, personal care, and monitoring to drive efficiencies and operational improvements, which is expected to enhance revenue and improve net margins.
  
• Strategic divestitures of select platforms are anticipated to optimize the capital structure, enhance long-term growth prospects, and create shareholder value, potentially boosting earnings.
  
• The shift from shared-risk contracts to fee-for-service contracts in the NEMT segment is aimed at reducing working capital volatility and improving cash flow, thereby positively impacting net margins and earnings reliability.
  
• With a total addressable market exceeding $6 billion and an active pipeline of $300 million in annual contract value, new contract opportunities are expected to significantly offset prior attrition and drive revenue growth.
  
• Enhancements in the Board of Directors with expertise in Medicaid, Medicare, AI, and financial efficiency aim to improve operational execution and support the company's strategy, likely leading to better long-term earnings and shareholder value.

ModivCare Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ModivCare's revenue will grow by 1.2% annually over the next 3 years.
• Analysts are not forecasting that ModivCare will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate ModivCare's profit margin will increase from -7.2% to the average US Healthcare industry of 4.9% in 3 years.
• If ModivCare's profit margin were to converge on the industry average, you could expect earnings to reach $141.5 million (and earnings per share of $10.11) by about May 2028, up from $-201.3 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 0.8x on those 2028 earnings, up from -0.1x today. This future PE is lower than the current PE for the US Healthcare industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 0.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

ModivCare Future Earnings Per Share Growth

Risks

• The unprecedented disruption from Medicaid redetermination and increased healthcare utilization led to unpredictable revenue shifts, which could continue to impact revenue stability.
  
• Financial strain from rising costs and MA reimbursement cuts may result in contract losses, reducing revenue by approximately $200 million, which could impact earnings.
  
• The transition to fee-for-service contracts aims to mitigate utilization exposure, but the timing and success of these renegotiations are uncertain, potentially impacting cash flow and working capital management.
  
• Risks associated with Medicaid budget cuts could further squeeze revenues, especially under fee-for-service contracts that may not fully compensate for member mix changes.
  
• Market volatility and client financial pressures led to significant contracts losses, adding uncertainty and affecting future revenue predictability.

Valuation

• The analysts have a consensus price target of $5.938 for ModivCare 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 $12.0, and the most bearish reporting a price target of just $2.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $141.5 million, and it would be trading on a PE ratio of 0.8x, assuming you use a discount rate of 11.4%.
• Given the current share price of $1.26, the analyst price target of $5.94 is 78.7% 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.