Analysts expect this managed services firm to grow at 30% annually over the next five years.
Evolent Health, Inc. (EVH)
From Canaccord Genuity Research
The recent pullback provides a buying opportunity in Evolent Health, Inc. (EVH). We reiterate our BUY rating and $28 PT. EVH delivered upside to 3Q'18 estimates. Implied 4Q'18 core guidance is below our previous estimate and down sequentially from 3Q'18 due to timing of Florida Medicaid contracts. Any pullback provides an opportunity to initiate a position or add to holdings as the regulatory environment appears to be setting EVH up for continued stable growth
over the next several years.
The addition of New Century in the cardiology/oncology is another plus that should further build the company’s pipeline in the years to come. Client expansion with SOMOS also offers optimism heading into 2019.
Key positive: Handily beats 3Q'18 estimates and announces expansion opportunities with recent new customer SOMOS.
Key negative: 4Q'18 revenue guide implies a sequential decline in core EVH services revenue and adj-EBITDA.
Additional highlights:
• 3Q'18 tops expectations. Non-GAAP revenue was $150.2M (+39% y/y) and beat our estimate by 6% and cons. by 5% and came in above guidance $140-$144M. Adj-EBITDA was $4.8M (+81% y/y) and beat our estimate by 31% and consensus by 20% and came in at the high end of guidance $3-$5M.
• 3Q'18 outperformance primarily related to two factors. First, successful start-up of the Florida managed Medicaid wins led to implementation revenues which contributed to the beat. Secondly, the company was able to book performance fees from Next Generation ACO’s that led to outperformance versus guidance and our estimates.
• Additional managed Medicaid win opportunity commentary encouraging. 2018 was a successful year for provider-sponsored wins in 5 Florida regions. Management alluded to the potential for additional wins in managed Medicaid in the coming quarters; the company stated it is hopeful of winning 1 or 2 opportunities in 1H19. We will continue to conduct diligence to attempt to ascertain the geography and potential size.
• Health plan True Health remains stable. True Health is a segment that has been focused on since the acquisition. Mgmt. stated that it expected the medical cost ratio to stabilize between 1Q'18 of 71% and 2Q'18 of 80%; the medical cost ratio in 3Q'18 did come through at 74%. We expect True Health to be both a learning opportunity for EVH in the managed care market, while also offering a revenue growth opportunity. Specifically, management noted that 60% of NM’s population is in Medicaid (True Health is based in NM). We will continue to monitor if Medicaid opportunities materialize in NM.
Maintain $28 PT based on 2.4x ‘19E Services revenue (excluding Health Plan revenues). Peers trade at 2.3x and EVH currently trades at 2.0x.
Richard Close and Brian Hoffman, Canaccord Genuity Research, www.canaccordgenuity.com, November 7, 2018