CANO | Despite Positive LT Outlook, Post-COVID Economics Likely to Linger
Background
We like the value based care market and believe in the long term opportunity to curb costs relative to fee-for-service providers, and CANO has been a name we've tracked as we've followed the space. The opportunity to take risk on a global capitated premium, and benefit from lower costs by delivering better care seems like a really and growing opportunity. We've talked to market participants across the industry and continue to the future opportunity is significant. However, and like other providers, CANO has been caught off guard by rising COVID costs, a tight labor market, and rising construction costs for their expansion needs.
A key drawback we saw for CANO was their concentration in Florida, a market that appears highly penetrated for value based care. However, their de novo expansion strategy looked like an attractive growth opportunity as they planned to open care centers in several other states. With the tight labor market, and other reasons, the company has decided to rely more heavily on acquiring growth as opposed to de novo expansion. We've seen solid growth in our tracking tools unique to the company (locations tracker, provider tracker, fundamental model) and there is currently an activist (Third Point) which is advocating for a sale of the company.
Thesis
Cano Health’s growth strategy is driven in the near- term by management’s expectation to add between 54-59 de novo centers in the coming year. While the company certainly has runway to do this, their commentary on the tight labor market and FY22 capex guide of -$40MM to -$60MM calls the timing of this expansion into question. Given that a de novo center requires between $1.5MM and $2.0MM in start- up costs to build, the guide implies approximately 27 to 40 centers at the low end of its target range for the full year. The real power of the model is in taking on new and undermanaged patients, coding for higher acuity and higher reimbursement, and benefiting from lower costs over time as they better care for the patient. The acquisition strategy does not provide the same level of patient level margin expansion and would open up a different set of risks compared to growth through de novo expansion.
In order to track CANO’s progress on a monthly basis throughout the year, we have developed unique provider and locations trackers that will inform our model as to new and “coming soon” openings, as well as the number of providers (by taxonomy code) in these locations. Provider counts are closely associated with enrollees, and ultimately revenue.
Cano has been explicit about the headwinds they faced during the pandemic in regards to onboarding and correctly scoring new patients. COVID drove additional costs, and negatively impacted patient economics. Also, CANO has noted that a tough labor situation has shifted their focus to maximizing penetration in their targeted markets, rather than simply pumping out new centers.
Despite our favorable long- term view for value- based models, we expect that the current headwinds will negatively impact both revenue and EBITDA expectations. We have decided that the previous COVID headwinds and multiple re-rating will likely outweigh the positive tailwinds that could occur in the long- term. For that reason, we have added CANO to our short bias list for the time being.
Valuation
Since the de-SPAC, CANO has traded between ~8x after the initial de-SPAC and ~33x at its peak. In Quad 4 and related risks have defined 6x-16x EBITDA as a more feasible range for the multiple to settle. Utilizing this range and our FY23 EBITDA estimate of $257.6MM versus consensus of $279.0MM, we expect continued degradation in the near- term.
Catalysts/Risks
- Hedgeye Locations & Provider Trackers | Although not able to define as specific ratios for volume-to-staffing as we have in the past, these trackers have worked as effective catalysts in the path for monitoring new hires and attrition. With CANO’s guide for a substantial number of de novo centers in FY22, we will use these results to track their progress and inform our model.
- Publicly Available HC Labor Series (JOLTS) | Staffing shortages and subsequent labor inflation is the most important theme in HC right now. While CANO will be able to mitigate some of these headwinds in that the majority of their hiring is not nurses, they did note that the “tough labor market” has shifted their focus to tuck-ins that would add capacity to existing markets. These series will inform our outlook.
- 1Q22 Press Release, Earnings Call, Guide | From what we can see so far, CANO looks to have successfully opened 15 centers in 1Q22, keeping them on track with their original guidance from 4Q21 Earnings. From the company's 1Q22 press release and earnings call, we will be able to validate the tracker results, gain insights on how hiring and expansion has progressed throughout the quarter, and learn of any potential revisions to the FY22 guide.
Key Slides
All data available upon request. Please reach out to with any inquiries.
Thomas Tobin
Managing Director
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