Healthcare Execution Flaws And Margin Pressures Will Yield Modest Turnaround

Key Takeaways

• Delayed profitability, execution missteps, and difficulty in risk adjustment have constrained agilon health's margin and earnings improvement despite favorable demographic and policy trends.
  
• Market exits, cost pressures, and payer negotiation risks threaten to undermine recurring revenue streams and limit sustainable growth in the value-based care sector.
  
• Operational challenges, missed internal targets, and unfavorable cost trends threaten agilon health's profitability, with risks compounded by contract uncertainties and intensifying competition in value-based care.

Catalysts

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

• Although agilon health is positioned to benefit from the long-term increase in the U.S. senior population and the shift toward value-based care, its near-term revenue growth is constrained by underperformance in risk adjustment and delayed realization of profitability from recent operational enhancements.
  
• While advances in healthcare digitization and analytics should theoretically improve agilon's ability to identify high-risk patients and manage chronic conditions, execution missteps and a lack of timely improvement in operational efficiency have resulted in continued pressure on net margins and delayed earnings improvement.
  
• Despite broad policy support for preventative and primary care, agilon health's dependence on favorable contracting terms with payers could be undermined if ongoing negotiations in 2026 fail to deliver improved economics, especially given the company's recent need to exit markets and reduce Part D exposure-potentially impacting long-term recurring revenue streams.
  
• Although the company's physician partnership model and technological investments should promote improved clinical outcomes over time, difficulty in recruiting and retaining high-performing primary care partners and inconsistent documentation in burden of illness assessments have led to lower-than-expected risk adjustment revenue, leaving financial performance vulnerable.
  
• While agilon's scale could eventually enable greater operating leverage, persistent cost inflation-specifically in inpatient care and specialty drugs-alongside growing competition in value-based care, may erode profitability and prevent the company from fully capitalizing on secular tailwinds, limiting both margin expansion and sustainable earnings growth.

agilon health Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on agilon health compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming agilon health's revenue will grow by 4.8% annually over the next 3 years.
• The bearish 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 -5.6% to the average US Healthcare industry of 5.4% in 3 years.
• If agilon health's profit margin were to converge on the industry average, you could expect earnings to reach $365.0 million (and earnings per share of $0.86) by about August 2028, up from $-329.1 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 1.4x on those 2028 earnings, up from -1.1x today. This future PE is lower than the current PE for the US Healthcare industry at 20.0x.
• Analysts expect the number of shares outstanding to grow by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

agilon health Future Earnings Per Share Growth

Risks

• The company is facing operational and execution challenges, as demonstrated by leadership changes, underperformance relative to internal expectations, and the need to withdraw 2025 financial guidance, which raises concerns about agilon health's ability to stabilize revenue and earnings growth over the long term.
  
• Lower than expected risk adjustment contributions for both 2024 and 2025, combined with inadequate documentation of patient conditions and delayed realization of outcomes from new clinical programs, have resulted in significant revenue shortfalls and negative medical margins, which threaten the company's path to profitability.
  
• Agilon health's cost trends, particularly in high-cost areas like inpatient services and oncology drugs, are running at approximately six percent and are subject to persistent industry-wide pressures such as rising specialty drug costs and labor expense escalation, which could further erode future net margins and earnings.
  
• The company's dependence on successful contract negotiations and payer bidding for 2026, as well as possible market or partner exits, exposes agilon health to fluctuations in pricing power and market share, introducing risk to both top-line revenue and long-term stability of its business relationships.
  
• Ongoing issues in accurately estimating and managing risk adjustment and medical costs, together with a measured approach to membership growth and selective new market entry, could constrain revenue growth and profitability if not resolved, especially as value-based care models face increased competition, regulatory scrutiny, and evolving reimbursement structures.

Valuation

• The assumed bearish price target for agilon health is $1.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of agilon health'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 $5.0, and the most bearish reporting a price target of just $1.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $6.8 billion, earnings will come to $365.0 million, and it would be trading on a PE ratio of 1.4x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $0.88, the bearish analyst price target of $1.0 is 12.5% 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.