Medicare Shifts Will Limit Revenue And Spur Operational Gains

Key Takeaways

• Reduction in Medicare Part D exposure aims to lower volatility but could lead to decreased revenue from this segment.
  
• Constraints on Medicare Advantage growth and repricing with reduced benefits may negatively impact near-term margins and overall growth.
  
• Strategic investments and enhanced payer contracts position agilon health for potential revenue growth and improved margins despite challenges in the Medicare Advantage market.

Catalysts

Provides healthcare services for seniors through primary care physicians in the communities of the United States.

• The company is focusing on reducing Medicare Part D exposure, aiming to lower it to less than 30% of membership, which could lead to lower revenue from this segment but is intended to reduce volatility in medical costs.
  
• The strategic decision to constrain Medicare Advantage membership growth in 2025 could result in lower near-term revenues, as they anticipate a decline in membership by approximately 4%, which will impact overall growth.
  
• Repricing 40% of membership in 2025 with improved percentage of premium economic terms but with decreases in supplemental benefits could affect net margins negatively, as decreased member benefits may not fully offset cost trends.
  
• Emphasis on quality improvements and payer contracts tied to performance above four stars could enhance future revenue through incentives but also increase operational costs associated with achieving these metrics.
  
• The ongoing transition to value-based arrangements with some partners on a glide path approach with care management fees rather than full-risk could result in temporary limitation on revenue and margin improvements as the company navigates these new models.

agilon health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming agilon health's revenue will grow by 9.0% annually over the next 3 years.
• Analysts are not forecasting that agilon health will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate agilon health's profit margin will increase from -4.1% to the average US Healthcare industry of 4.6% in 3 years.
• If agilon health's profit margin were to converge on the industry average, you could expect earnings to reach $363.5 million (and earnings per share of $0.88) by about April 2028, up from $-250.3 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 5.6x on those 2028 earnings, up from -9.0x today. This future PE is lower than the current PE for the US Healthcare industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

agilon health Future Earnings Per Share Growth

Risks

• agilon health has plans to enhance its clinical strategy and capabilities through continued investments, which could result in improved medical cost management and quality outcomes, potentially benefiting revenue and profitability.
  
• The company is focused on cost discipline by leveraging its scaled infrastructure and technology investments, which may help improve operating margins despite ongoing challenges in the Medicare Advantage market.
  
• agilon health is actively engaging in strategic contract negotiations with payor partners, including carving out risk elements it cannot control, such as reducing Medicare Part-D exposure, which could enhance net margins by minimizing financial volatility.
  
• The company's focus on achieving greater than 4-star quality performance with payors can lead to increased incentives and better payer contract terms, which may lead to stronger revenue yields and improved financial performance.
  
• With favorable trends in payer bids and potential improvements in Medicare Advantage rates signaled by CMS for 2026, agilon health could see enhanced revenue growth and profit margins in the future.

Valuation

• The analysts have a consensus price target of $4.113 for agilon 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 $8.5, and the most bearish reporting a price target of just $2.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.8 billion, earnings will come to $363.5 million, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 6.2%.
• Given the current share price of $5.47, the analyst price target of $4.11 is 33.0% 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.