New England Contract And Automation Will Drive Efficiency

Key Takeaways

• Strong organic growth through expanded client agreements and sales pipeline is expected to boost revenue significantly.
  
• Efficiency improvements and contract renegotiations aim to enhance profitability and long-term earnings.
  
• Elevated oncology costs and contract dependencies create financial risks, while AI investments could further constrain short-term profitability despite potential long-term benefits.

Catalysts

Through its subsidiary, provides specialty care management services in oncology, cardiology, and musculoskeletal markets in the United States.

• Evolent Health is experiencing strong organic growth, with a projected revenue growth rate of approximately 15% to 18% for 2025, driven by contracted business and a robust sales pipeline. This is expected to positively impact their revenue.
  
• The company is expanding its agreements with existing clients and adding new members and geographies, such as the recent technology and services contract with a large health plan in New England. This growth is likely to enhance their revenue outlook.
  
• Evolent Health is implementing automation and efficiency improvements, which are projected to result in significant direct cost savings. The full impact of these initiatives is expected to mature in 2026, potentially improving net margins.
  
• The renegotiation of three Performance Suite contracts is expected to secure significant adjusted EBITDA improvements, enhancing profitability and potentially leading to improved earnings.
  
• Evolent Health's strategic focus on capital allocation, including internal product development and reducing leverage, is aimed at supporting growth and improving long-term earnings. The company's plan to continue pursuing strategic M&A may also enhance future growth prospects.

Evolent Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Evolent Health's revenue will grow by 2.8% annually over the next 3 years.
• Analysts are not forecasting that Evolent Health will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Evolent Health's profit margin will increase from -3.7% to the average US Healthcare Services industry of 14.3% in 3 years.
• If Evolent Health's profit margin were to converge on the industry average, you could expect earnings to reach $397.1 million (and earnings per share of $3.39) by about May 2028, up from $-93.5 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 5.7x on those 2028 earnings, up from -12.8x today. This future PE is lower than the current PE for the US Healthcare Services industry at 66.8x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.7%, as per the Simply Wall St company report.

Evolent Health Future Earnings Per Share Growth

Risks

• The continuation of elevated oncology expenses poses a risk to margins, as the adjusted EBITDA for 2024 was at the low end of guidance due to higher cancer costs, which may constrain profitability if these costs persist.
  
• The dependency on renegotiated Performance Suite contracts that address prior oncology expense overruns may result in unanticipated financial volatility, impacting future revenues and earnings if these contracts do not perform as expected.
  
• Potential increases in medical cost trends, particularly in oncology, are a significant risk factor, as deviations from assumed 12% cost growth could negatively affect financial outcomes and operational forecasts.
  
• The restructuring of some Performance Suite contracts to more predictable models leads to a trade-off of a lower long-term margin, which could limit upside earnings potential in favor of more stable, yet constrained, profitability.
  
• The planned aggressive investment in AI-based automation initiatives in 2025, despite long-term benefits, will impose an estimated $10 million drag on adjusted EBITDA for that year, potentially impacting net earnings in the short term.

Valuation

• The analysts have a consensus price target of $15.154 for Evolent 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 $20.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $397.1 million, and it would be trading on a PE ratio of 5.7x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $10.35, the analyst price target of $15.15 is 31.7% 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.