Divestiture Of Contigo Health And Declining GPO Revenues Will Pressure Margins

Key Takeaways

• Divestiture of Contigo Health and declining GPO contract revenues may impact revenue and margins, signaling financial headwinds.
  
• Supply chain investments aim for growth but could pressure margins, while Class A share buybacks might not enhance earnings as expected.
  
• Premier's strategic initiatives in technology, supply chain, partnerships, and sustainability position it for long-term revenue growth and enhanced shareholder value.

Catalysts

Operates as a healthcare improvement company in the United States.

• The expected divestiture of the Contigo Health business suggests a potential reduction in revenue streams, as this business will move to discontinued operations, impacting total revenue.
  
• The ongoing GPO contract renewal process implies that net administrative fees revenue will likely experience a sequential decline in the short term, possibly affecting net margins as the company works through adjustments in member fee shares.
  
• The decrease in Performance Services revenue, driven by lower demand in consulting and timing issues in the Applied Sciences business, could lead to challenges in revenue growth unless new engagements or improvements in service uptake occur.
  
• Increased investments in the supply chain co-management business are intended to support growth, yet they may pressure net margins in the short term as costs rise before corresponding revenue benefits are realized.
  
• The repurchase of Class A common shares, despite reducing shares outstanding, may not significantly boost earnings per share if cost savings or revenue growth from complementary strategies do not materialize as anticipated.

Premier Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Premier's revenue will decrease by -7.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.2% today to 7.4% in 3 years time.
• Analysts expect earnings to reach $77.2 million (and earnings per share of $1.07) by about January 2028, down from $147.8 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 22.8x on those 2028 earnings, up from 14.9x today. This future PE is lower than the current PE for the US Healthcare industry at 23.7x.
• Analysts expect the number of shares outstanding to decline by 9.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Premier Future Earnings Per Share Growth

Risks

• Premier's fiscal 2025 first-quarter results exceeded expectations for total net revenue and profitability, providing a basis for confidence in their fiscal 2025 guidance. This suggests potential strength in future earnings.
  
• The company's strategy of returning capital to stockholders through dividends and share repurchases indicates a robust financial position, which may support the share price by enhancing shareholder value and confidence.
  
• Premier is leveraging technology to enhance their supply chain operations, identifying additional cost savings and driving contract renewals. This could sustain or increase their revenue and margins over time.
  
• The company is expanding its partnerships and engagements in performance services, including significant contracts with a government agency and a top pharma company. These partnerships could drive future revenue growth.
  
• Premier's efforts in disaster response and sustainability initiatives strengthen its reputation and relationships with key stakeholders, which may contribute to stable or growing revenue streams in the long term.

Valuation

• The analysts have a consensus price target of $20.86 for Premier 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 $23.0, and the most bearish reporting a price target of just $19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $77.2 million, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 5.9%.
• Given the current share price of $22.9, the analyst's price target of $20.86 is 9.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.