Summary of investments
We have debated at length here at HB Insights on how best to allocate to unprofitable names within US and global healthcare, and note that investor sentiment has moved away from the rewards of top line growth. business and is now focused on bottom line fundamentals. and more tangible sources of value. With that, there’s a lot to like about Privia Health Group, Inc. (NASDAQ:NASDAQ: PRVA) of the investment profile of.
PRVA fits the mold here with a clean balance sheet and a resilient revenue model. It has 80 in-situ at-risk contracts that cover approximately 856,000 awarded lives across its programs – up approximately 16% from the same period last year – and continues to grow revenue and profit operating on a sequential basis. While recent stock price performance is intriguing, valuations are keeping us on the sidelines for now, as I have noted that PRVA is trading at unjustifiably high multiples against its peers. Here I am pricing PRVA a hold with a price target of $42.
Catalysts to move the needle
To begin September, PRVA said it would team up with the hospital and nonprofit healthcare provider, OhioHealth, to “to form a strategic partnership and launch a medical group for independent providers throughout the state of Ohio”. It is understood that the partnership will expand OhioHealth’s already existing Clinically Integrated Network (“CIN”). OhioHealth’s system spans 47 counties in Ohio and includes 12 hospitals, more than 200 outpatient facilities, and other exposures to areas such as medical equipment, home health, and palliative care.
Together, the duo will launch a medical group for independent medical providers in the state of Ohio. It’s a separate system for Ohio doctors and other providers, who can choose to remain independent and care for patients across all payment methods. As an added value for new vendors, they get access to PRVA’s platform and suite of technologies, which helps to minimize administrative burden and perform data analysis.
Meanwhile, CMS released its proposed decisions on the 2023 Medicare Physician Fee Schedule in July. Management says the changes look positive for PRVA – for the Medicare Shared Savings Program (“MSSP”) in particular. [it now serves 11mm patients across 525,000 providers].
PVRA’s Q2 FY22 revenue also provides a number of beak-wetting droplets. Practice collections saw an increase of approximately 67.5% over the prior year and exceeded $615 million for the quarter. I noted that the company has already passed the midpoint of its upper guidance range here, although it does not expect any material bifurcation from the trends exhibited in FY21.
Meanwhile, the “Care Margin” – the company’s own metric for assessing revenue available for business operations [defined as total revenue minus provider expense] — was $76.2 million for the quarter, up 36% from the same point last year. As the company expands its supplier base, I also estimate an increase in care margin as a result. Similar trends are seen in “platform contribution margin” which is calculated as revenue, minus the sum of vendor expenses plus platform cost, plus stock-based compensation. Reconciliations between GAAP earnings and these two measures are observed in Appendices 1 and 2.
Figure 1. Care margin grew ~36% YoY and continues to show strength as supplier base expands
I expect these trends to continue in FY22 and FY23.
Exhibit 2. Platform contribution margin showing equally favorable trends
- There’s the question of the $3.66 million in stock-based compensation (“SBC”) and whether that should in fact be added to the operating loss.
- It should be noted that SBC shrunk significantly YoY from Q2 FY21.
- Treat SBC as a realized expense [as I prefer to] the platform’s contribution margin slips to 33.84mm, a negligible impact. In the second quarter of FY21, however, the results are very different.
PRVA Q2 wins a standout
Privia came in with a strong set of numbers last quarter that beat consensus estimates. Revenue increased 48.6% YoY to $335.5M, highlighted by a 31% YoY gain at Implemented Vendors [now at 3,541] and approximately 16% year-on-year change in lives attributed to care based on value [now 856,000]. That brought that down to a GAAP operating loss of $5.3 million from a loss of $193 million the year before. Meanwhile, the net loss of $10.5 million or $0.10/share for Q2 FY22 included an SBC expense of $18.5 million ($0.16/share) [down from $202mm in Q1 FY22].
The strong earnings package also gives a good overview of what we buy in PRVA. Exhibit 3 illustrates the year-over-year change in PRVA’s revenue mix as it exits the second quarter. In particular, the 70% year-over-year gain in shared savings revenue is an interesting element of the quarter and provides unique insights into segment expectations for the full year.
Exhibit 3. Revenue growth remains remarkable for PRVA, with key revenue drivers posting double-digit gains in the second quarter of FY22
Additionally, we have good clarity of the company’s balance sheet and book value from its financial statements. Goodwill as a percentage of total assets sits at 17% of total assets and is actually down about 160 basis points year-over-year, while intangible assets are light at around 800 basis points. I’m happy with these numbers, as we have a broad supply of tangible book value – $281.1 million to be precise. However, this pushes the shares to trade at ~16x tangible book value and ~10.7x total book value – large multiples with no profitability whatsoever.
Evaluation and conclusion
The shares appear to be priced high at current multiples and are trading at a premium to the median of GICS industry peers, as shown in Appendix 4. Upside potential when compared to the peer group. Plus, 10.7 times book value looks expensive, even at face value. If we were to calculate what we would theoretically pay on this multiple [at current market cap, shares outstanding and book value], that would be $42.22 – meaning we’d be paying slightly overpriced at 10.7x book value. I say we are paying too much due to PRVA’s lack of profitability and earnings momentum to justify paying any premium. As such, the valuation is what mostly keeps us away from this name right now.
Exhibit 4. Multiples and comparisons analysis – PRVA priced above peers
Considering the points raised throughout the analysis, PRVA offers compelling value on many levels, from its isolated business model to its resilient earnings profile to a declining economic climate. These are incredibly attractive characteristics that deserve to be eventually included in the equity risk budget of portfolios.
However, the stocks are highly valued at current multiples and, even relative to their peers, appear to be trading at a substantial premium. The valuation is therefore the main point of tension of this name for us, and I think that there is a risk of a revaluation of the stock downwards due to its current valuation. I rate PRVA as a hold with a price target of $42, and although the stock finished at $42.74 post trade yesterday, this is a short-term gain in price action which neither negates nor deviates from the entire investment thesis stated throughout this report. PRVA is a catch.