Evolve Health: A Little Complicated, But Interesting (NYSE:EVH)

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shares of developed healthNYSE: EVH, Behind a big deal, a big trick has been seen. To judge this deal on its merits and to find out what the implications are going forward, I go back to June when I concluded Evolent Health saw healthy growth, but that was all.

The value-based care provider seeks to profit both payers and patients, and while it still looks attractive and growth was pretty solid, no real profitability was shown by the business. While liking growth (on a relative basis), I was apprehensive about the overall valuation given the margin crunch.

setting up a thesis

Evolent is a value-based care provider that provides technology-driven solutions to both health plans and providers by improving health while cutting costs, benefiting all stakeholders in the process.

The business will generate $891 million in revenue in 2021, with two-thirds from clinical applications and the rest from its Evolent Health Services, on which the company posted EBITDA of $66 million. The company reported a GAAP loss of $38 million, equivalent to $0.44 per share, hurt by an increase in the fair value of a contingent transaction consideration and prepayment loss on debt. The company made a total of thirteen adjustments to arrive at an adjusted profit of $0.02 per share, or one million. I’m happy to adjust for quite a few items, but not for stock-based compensation expense of $17 million, among others.

The 88 million shares worked out at $30 per share, at a $2.6 billion equity valuation, as the company operated a flattened net cash position at the time. Valued at roughly 3 times sales, the company wasn’t exactly financially profitable, as the company guided for 2022 sales to grow to $1.15 billion, with EBITDA of around $85 million. After a solid first quarter, the company increased full-year guidance, now seeing sales of $1.185 billion and EBITDA of nearly $90 million.

In June, Evolent announced a deal to acquire IPG, a technology company that provides surgical management solutions for musculoskeletal conditions, in a deal valued at $375 million, which excludes $87 million in proceeds. With $140 million in revenue, the company is valued at 2.7 times sales (based on the upfront price tag), as 20% revenue growth and $25 million in EBITDA (on a relative basis) look pretty strong.

Net debt was set to increase to $465 million, with a leverage ratio of almost 3x seen, as realized earnings were not seen here. The lack of earnings was really my problem with Evolent, as I’m not happy with using the adjusted earnings number, realistic earnings still don’t really exist.

Latest information

Since urging a cautious stance at $30 by the end of June, shares actually moved up significantly last summer as shares reached a high of $40 in September. This was partly driven by M&A speculation in the sector, as shares have now moved up to $27 per share, having fallen to $22 in November.

The momentum in share price was driven by solid second-quarter results, in which revenue was up 44% to $320 million. Adjusted EBITDA of $22 million was up 80 basis points from the prior year at 6.8% of sales as minimal GAAP losses were still reported here. On the back of the IPG deal, the company raised the midpoint of full-year sales guidance to $1.34 billion, indicating that real growth was seen in addition to the impact of the IPG deal. Full year adjusted EBITDA clocked in at approximately $100 million, which is also largely in line with expectations.

In November, third quarter results showed that revenue grew 58% to $353 million, with EBITDA of $28 million translating into a margin of 8.0%. Based on performance, the company essentially reaffirmed full year guidance with respect to sales and EBITDA. Net debt after the IPG transaction came in at $255 million for a leverage ratio of approximately 2.5x.

With 100 million shares now trading around $25, the company is given an enterprise valuation of $2.7 billion, which equates to roughly 2 times sales of around $1.4 billion. Shares are trading at a 27x EBITDA multiple, with no actual earnings reported at the time.

a big deal

By mid-November, Evolent announced that it had reached an agreement to acquire NIA (Magellan Specialty Health), the specialty benefits management company it owned. Centene (CNC),

The deal is valued at $650 million, including a $250 million equity issue at $29.50 per share, with a possible another $150 million payment as contingent consideration in 2023, for a potential $800 million deal tag. NIA generates some $250 million in revenue and $50 million in EBITDA, as the total deal tags in at more than 3 times sales and roughly 16 times EBITDA, largely in line with Evolent’s own valuation.

The deal has some additional benefits though, as the company expects the deal to generate $85 million in EBITDA by 2024, as the enhanced relationship with Centene should deliver another $20 million in EBITDA at that time. The $400 million cash component creates that pro forma net debt will grow to $655 million, with pro forma EBITDA clocked at approximately $200 million over time, keeping leverage in line (albeit higher leverage in the near term) as anticipated synergies take time Will take time to implement.

With 8.5 million shares to be issued, the pro forma share count comes to approximately 108 million shares as shares rose some $4 to $27 per share, increasing in value to more than $400 million in response to the deal. Because the market clearly likes to transact. , and a deeper and more committed relationship with Centene.

and now?

Since June, shares are down about 10% as the company announced another big deal, to which the market reacted extremely favorably. Meanwhile, the company has seen an acceleration in sales momentum in the second and third quarters, although no actual earnings have been reported here yet.

Amidst all these developments, I see the appeal growing a bit, as the latest deal certainly looks interesting, but the point is that there are still no real earnings to show. This is what makes me cautious here still, though I’m happy to keep a close eye on developments from here on out.

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