AdaptHealth (AHCO) Stock: Looks Very Attractive Right Now

Investment Thesis

AdaptHealth Corp (NASDAQ:AHCO) is a national leader in providing patient-centered, healthcare-at-home solutions, including home medical equipment, medical supplies, and related services. The company operates in a rapidly growing industry driven by an aging population and a shift toward value-based care. AdaptHealth has demonstrated strong growth through acquisitions and non-acquired channels.

In summary, AdaptHealth operates in a growing industry, has a strong track record of growth, generates cash flow from operations, and has a manageable level of debt. With an attractive valuation compared to peers and favorable updated guidance, AHCO stock is a compelling investment opportunity for investors looking to gain exposure to the healthcare-at-home market.

Market Tailwinds

AdaptHealth Corp operates in the home medical equipment and supplies industry, which provides essential medical equipment and supplies to patients in the comfort of their homes. This industry has experienced significant growth in recent years, driven by demographic trends, such as an aging population, and advancements in medical technology, allowing more treatments to be done in the home setting. Additionally, the ongoing COVID-19 pandemic has accelerated the demand for home healthcare services, as patients seek to avoid exposure to the virus in hospitals and clinics.

Investors should look for the tailwinds driving this industry, including an aging population, the increasing prevalence of chronic diseases, advancements in technology, and the trend toward value-based care. As the population ages, the demand for home healthcare services is likely to increase, as older patients prefer to receive care in their homes rather than in hospitals or clinics. Additionally, chronic diseases such as diabetes, obesity, and heart disease require ongoing care that can be delivered in the home setting, providing a growth opportunity for the industry.

Furthermore, the industry is benefiting from advancements in medical technology, allowing patients to receive high-quality care in the comfort of their homes. Remote monitoring devices, telemedicine, and other digital health technologies are transforming the industry and enabling more patients to be treated in the home setting. Finally, the trend towards value-based care, which rewards healthcare providers for positive health outcomes rather than the number of services provided, is also driving growth in the home healthcare industry.

Revenue Breakdown

AdaptHealth Corp has announced its financial results for the fourth quarter and fiscal year ending December 31, 2022. The company is a national leader in providing patient-centered, healthcare-at-home solutions including home medical equipment, medical supplies, and related services, providing needed medical equipment and supplies to approximately 3.9 million patients annually.

For the fiscal year 2022, AdaptHealth Corp.’s net revenue increased by 21% over the full-year 2021, driven by acquired growth of 17.9% and non-acquired growth of 3.5%. Adjusted EBITDA was $593.8 million, an increase of 4.9% from full-year 2021, and cash flow from operations was $373.9 million, up from $275.7 million in 2021. However, net income attributable to AdaptHealth Corp. decreased from $156.2 million in 2021 to $69.3 million in 2022.

Regarding the fourth quarter of 2022, AdaptHealth Corp. reported net revenue of $780.3 million, representing an increase of 11.1% compared to the fourth quarter of 2021, including non-acquired growth of 5.3%. The company noted strong sequential growth in Sleep revenue and a further improvement in the supply of PAP equipment. The net loss attributable to AdaptHealth Corp. was $2.6 million, compared to the net income attributable to AdaptHealth Corp. of $22.9 million in the fourth quarter of 2021. Adjusted EBITDA was $146.0 million, a decrease of 7.7% from the fourth quarter of 2021.

The company is updating its initial financial guidance for the fiscal year 2023, with net revenue of $3.160 billion to $3.240 billion, adjusted EBITDA of $650 million to $710 million, and total capital expenditures representing 10-12% of net revenue. Management stated that the shortfall in Adjusted EBITDA was due primarily to larger impacts from revenue mix and cost pressures than previously expected, but they are excited about the immediate future and confident that new cost containment programs will ensure they deliver on updated guidance.

CEO Steve Griggs commented, “We advanced a number of strategic initiatives, including completing the integration of our merger with AeroCare, stabilizing and optimizing our internal processes, and continuing to invest in the technology, tools, and talent to deliver on the goals that we presented at our Capital Markets Day. As a result of these investments and the efforts of our 10,931 employees, AdaptHealth has continued to grow and prosper, and the company is entering 2023 from a position of strength.”

Risks

AdaptHealth faces a number of risks that could negatively impact its financial performance and shareholder value. Here are some potential risks facing the company:

1. Regulatory Risks: As a healthcare company, AdaptHealth is subject to regulations at both the federal and state level. Changes in regulations, particularly around reimbursement rates, could have a significant impact on the company’s financial results.

2. Dependence on Government Programs: AdaptHealth derives a significant portion of its revenue from government programs such as Medicare and Medicaid. Changes to these programs or a shift away from them could negatively impact the company’s revenue and profitability.

3. Integration Risks: AdaptHealth has grown rapidly through a series of acquisitions, which can present risks in terms of integrating new businesses, systems, and employees. Any issues with integration could negatively impact the company’s financial performance.

4. Competitive Pressure: The healthcare-at-home industry is highly competitive, with a number of large players competing for market share. Any significant shift in market share could negatively impact AdaptHealth’s revenue and profitability.

1. Debt Burden: As of December 31, 2022, AdaptHealth had total debt of approximately $2.6 billion. The company’s high level of debt could limit its ability to invest in growth opportunities, make strategic acquisitions, or weather any downturns in the industry.

Valuation and Conclusion

AdaptHealth Corp currently trades at a forward P/E ratio of 12.6x, which is lower than its industry average of 15.7x. The company’s price-to-sales (P/S) ratio of 0.6x is also lower than the industry average of 1.4x. This indicates that the company’s shares are undervalued compared to its peers in the industry.

Furthermore, AdaptHealth’s price-to-earnings growth [PEG] ratio of 0.7x is lower than the industry average of 1.3x, indicating that the stock is undervalued on a growth-adjusted basis.

When compared to its peers, AdaptHealth’s valuation metrics indicate that the stock is undervalued. This presents an attractive opportunity for investors who are looking for a potential bargain in the healthcare industry.

In addition to its attractive valuation, AdaptHealth’s strong financial performance and positive industry tailwinds make it an attractive investment opportunity. The company’s ability to provide healthcare-at-home solutions to a growing patient population presents significant growth opportunities.

In conclusion, AdaptHealth Corp is a buy for investors looking to invest in an undervalued company with a strong financial performance and positive industry tailwinds.