Cano Health: A Bet on Value-Based Primary Care

(Hristian Hristov)
(Hristian Hristov)
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On yesterday’s ROIC-only stream, a member called in to take another look at Cano Health (CANO). Cano Health went public in June after merging with Barry Sternlicht’s SPAC. Justin gave it another quick interesting rating, so today we’re diving a little deeper.

See Justin’s quick take on Cano Health here!



Overview

  • Cano Health, Inc (CANO) is a valued-based primary care provider for seniors and underserved communities.
  • The company operates primary care centers and supports affiliated medical practices that specialize in primary care for seniors in eigth states and Puerto Rico.
  • It provides health management programs including telehealth, prescription home delivery, wellness porgrams, transition of care, and high-risk and complex care management.
  • Cano Health primarily serves minority and low-income populations.
  • The company focuses on high-touch population health and wellness services to Medicare Advantage, Medicare Global, and Professional Direct Contracting (DC) and Medicaid capitated members.
  • As of today, the company provided services through 126 owned medical centers.

Q3 Earnings Highlights

Last week, Cano Health reported its second quarterly report since becoming a public company.

Financials

  • Revenue for the quarter grew 100% YoY to $527 million.
    • Over 95% of revenue came from Medicare and other capitated revenue.
  • Adjusted EBITDA for the quarter grew 53% YoY to $35 million (6.6% margin).
  • Total membership was up 105% YoY to 211,000.
    • Medicare capitated membership was up 65% YoY to 120,000.
  • Cano’s medical claims expense ratio imporoved to 75.6% and is on track for full year ratio of ~75%.

Management Commentary

Marlow Hernandez Cano, Founder + CEO

  • On CanoPanorama: “CanoPanorama is a unique population health platform that provides an end-to-end solution for patients, clinicians, and health care professionals to improve the health of an individual patient while optimizing the health of the entire community. During these difficult times, CanoPanorama has helped us navigate the COVID-19 pandemic by allowing us to coalesce real-time actionable data from multiple sources, including hospital admissions, emergency room visits, laboratory diagnostic, primary care visits, and specialist consults. Taken together, this integrated data are used by primary care providers and other clinicians to assess risk and guide customized treatment plans while allowing Cano Health to optimize the well-being of our entire patient population.”
  • On its Healthy Heart program: “The Healthy Heart program is designed to predict and prevent cardiovascular disease through early detection, individualized treatment of risk factors and education about healthy lifestyle choices. The program is designed to significantly reduce the probability of a patient suffering heart attack or stroke. And when our patients live healthier lives, we all do better. because through our value-based model, our clinical and financial objectives are aligned.”
  • On navigating Covid-19: “We are very proud of the success we’ve achieved in protecting our patients from the virus with a mortality rate that is at least 50% lower than the senior population in Florida. I’ve said this before, but it bears repeating, statistically, one of the safest places for patients to be during this pandemic or at any time is at a Cano Health Medical Center as one of our members.”
  • On the focus of primary care: “Cano Health spent about 12% of the revenue it receives from payers on primary care, that’s roughly 2x more than the national average.”

Guidance

Cano Health release guidance for the rest of 2021 and initial guidance for FY2022 last week. The company raised guidance for both.

FY2021 Guidance

  • The company expects total memberships to increase to 218K, a 3.3% increase from Q3.
  • Cano expects revenue of $1.7 billion and adjusted EBITDA of $118 million (6.9% margin).
  • As of today, November 16th, Cano Health has 126 total owned medical centers. By the end of the year Cano targets ~130.

FY2022 Guidance

  • For FY22, the company expects total memberships to grow ~30%.
  • Cano expects over 50% growth in revenue and over 45% growth in adjusted EBITDA.
  • By the end of next year, Cano is targeting between 184 and 189 owned medical centers.

Valuation

  • At yesterday’s closing price of $11.49, CANO’s market cap is ~$5.5 billion.
  • Accounting for net debt, CANO’s enterprise value is ~$6.2 billion.
  • Using management’s FY22 guidance, CANO is currently trading for 2.4x FY22 sales and 36x FY22 EBITDA.

KR: Cano Health’s growth is focused on expanding its footprint organically and through strategic acquisitions. Its mission is to provide higher quality care to underserved seniors as the population ages. This is not only a mission that’s easy to get behind but a mission with strong tailwinds. According to Cano, the Medicare market is currently an $800 billion market growing 8% annually. ~95% of the company’s revenues are recurring from government sources. At 36x forward EBITDA, CANO is not cheap, but investors must pay up for quality. An investment in Cano Health hinges on trust in the management team to continue its high growth without overpaying for its tuck-in acquisitions.

JO: 30x EBITDA is too expensive. Even assuming aggressive expansion from 113 to 518 locations, revenue growth from $1.7B to $12B, and EBITDA growth of $120M to $1.3B, a quick DCF suggests a $10.66 target price.

For reference, some premier, large post-acute providers like $AMED or $LHCG are trading for 18-20x 2022 EBITDA and $HUM is trading for 13x 2022 EBITDA. It’s clearly a space where investors are willing to pay up, but unless you believe that $CANO expands its footprint materially more than 5x in the next 10 years, then it’s probably fairly priced.

But maybe a ROIC member might know something different, and that it will 10-20x in the next 10 years. If this is the case then we should take a closer look… Let us know!

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