Credit Suisse https://www.credit-suisse.com, sees Cano Health https://canohealth.com, a PCP-centric technology powered healthcare delivery and population health management platform to be a growth play at an attractive valuation. Cano Health (CANO) provides care to ~197K members (~56% Medicare, 26% Medicaid, 18% ACA) in 106 medical centers and 15 markets.
The company is planning future expansion across the U.S., with a goal of reaching 370K members by 2024. Around 80% of the company’s revenues are Medicare capitated revenue and the company is well positioned to take advantage of the continuing shift from traditional payment models to value-based care.
CANO has experienced strong growth through their flexible, multi-pronged strategy in both new and existing markets. The company has consistently gown membership ~40% organically Y/Y between 2017 and 2020 and in 1Q21.
Organic growth has been further fueled by the selective conversion of best-performing affiliates into CANO-owned medical centers and the purchase of locally adjacent practices. Finally, growth has been complemented by accretive acquisitions that have enabled CANO to scale into new markets and build density in existing markets.
Valuation disparity provides opportunity. Tech-enabled PCP companies seem to be split into two valuation buckets. The first group comprising OSH, AGL, etc., trades at a 6-8x 2022 revenue multiple, reflecting attractive top-line growth (~40-50%) and expectations are that LT EBITDA margins will approach 15-20%. On the other hand, PRVA, CANO, CMAX, etc. are trading at a 1-3x 2022 revenue multiple.
While CANO’s business model, top line growth trends, and long term EBITDA margin target are more comparable to the former group, the shares still trade at a significant discount, which is partly attributable to CANO’s geographic concentration and the SPAC negativity.
Over the next 12-18 months as CANO expands into additional geographies and meets/exceeds their projections (which currently do not include any contribution from the Direct Contracting program and any incremental M&A), analysts expect the shares to at least partially close the valuation gap to peers and trade at 3x0x which is the analyst’s 2023 revenue estimate (or~4.1x 2022) 12 months from now, yielding an $18 TP (~67% upside potential) and thus an Outperform rating. Risks include geographic & payer concentration, competition, and significant capital investments.
If you want to ask questions, provide feedback, or news, email Jailendra Singh at jailendra.singh@credit-suisse.com or call 212-325-8121.