Cano Health (“CANO”) – The Investor Weekly Stock Report

Summary

Cano Health addresses the fastest growing market in healthcare. The Company is accelerating the shift to capitated care and differentiates itself to primary care peers.

Cano Health has a proven ability to improve medical claim expense ratios with patient tenure.

The company is a top provider by quality for Humana, United and Anthem.

Cano has a highly scalable geographic footprint: 113,000 members, 2 million patient encounters, ~3% total penetration in existing markets, and focused on underserved and dual-eligible members.

Return vs S&P: 1 Year

Financial Overview: August 20201
Market Cap: $2.4B
Volume: 3,178,941
52 Week Range: $9.20 to $17.43
EV: $6.8 billion
Source: Seeking Alpha Premium

Company Overview

Cano Health went public by merging with the SPAC JAWS Acquisition in July of 2021. This Miami, Florida based healthcare firm with 108 medical centers focuses on primary care for seniors and operates in 5 states including Florida, Illinois, Nevada, New Mexico and Texas.
Cano’s health mission is to provide “high quality healthcare to underserved seniors.” According to the Company’s website, 80% of members are from minority groups. Additionally, 80% of health associates are from minority groups and 85% of Cano Health associates are bilingual.

Cano’s growth strategy is a combination of de novo (“new growth”), acquisition and affiliate partnerships. And the growth has been explosive. The Company’s pro forma business mix provides both diversity and stability.

Leadership
Cano has exceptional management, led by Dr. Marlow Hernandez. Dr. Hernandez is the Chief Executive Officer of Cano Health and serves on its Board of Directors. Under Hernandez’s leadership, Cano Health has become one of the fastest growing and most respected health care companies in Florida.

Ownership Structure

Market Overview

Cano is serving a large and growing market. The $800 billion Medicare market continues to grow at 8% annually. The Company has exhibited high growth and a scalable business model, accelerated by its relationship with Humana. Going public this year further accelerated that growth and allowed Cano to capture first-mover advantage for capitated care in new geographies.

*Capitation is a payment arrangement for health care services in which a physician or group of physicians receives a risk adjusted amount of money for each person attributed to them, per period of time, regardless of the volume of services that person seeks.

Capitation payments incorporated into a payer’s value-based programming can spur greater provider accountability, reduced care costs, and stronger healthcare outcomes for members. Capitated Medicare has been growing at 30% annually since 2020.

The Company is currently in 15 markets with 71 medical centers and has a total of 112,821 capitated members. Cano has a network of 720 primary care providers.

Cano operates with a flexible growth model:

1. Build
– De novo centers
– Expand existing centers

Purpose-built medical centers leverage demand in existing markets and support growth in new markets. Full-service medical centers drive superior clinical and financial outcomes.

2. Manage
– Existing Affiliates

Affiliates provide capital efficient means to generate scale and density in markets. Affiliates also provide inherent clinical capacity, with tremendous amount of operational data on affiliate partners and members.

3. Buy
– Enter new markets through select acquisition of physician practices

Cano has a track record of rapidly integrating large acquisitions with an average 41% increase in EBITDA in Year 1. The Company focused on targeting capitated senior primary care groups to efficiently scale in new and existing markets.

Peers
HumanCo Acquisition Corp. (HMCO)
FirstMark Horizon Acquisition Corp. (FMAC)Source: Seeking Alpha Premium

A Look at the Financials

The company grew revenue by 130% year-over-year to $393 million in Q2 2021. Revenue growth from 2017 to 2020 was 86% (CAGR). Total membership for Q2 2021 was 156,000, which was an increase of 57% year-over-year. This reflects strong membership growth and operational expansion.

“Adjusted” EBITDA of $25 million, increased 53% year-over-year.

Net income was $4.9 million in Q2 2021 compared to a loss of $11 million in Q2 2020. Cano Health has been growing organically by opening new clinics and inorganically by acquiring companies.

The company recently raised its guidance for revenue and EBITDA for full years 2021E and 2022E. The increased guidance was based on organic growth without taking into account any recent or future acquisitions. The company now expects revenue of $1.6 billion for 2021E and between $2.5 and $2.6 billion for 2022E.

Organic Growth
Cano Health is on track to open 15-20 de novos by year end 2021. Cano has started a direct contracting entity. The direct contracting entity is an important development for value-based care and another endorsement of the innovative care model.

Acquisitions and Affiliates
University Healthcare and its affiliates (FL)
Doctor’s Medical Center (FL)
Medical Practice in Corpus Christi, TX
Behavioral Health Specialty Group (FL)
Two Medical Centers in Las Vegas, NV
Medical Practices and Infrastructure Managing Affiliates (FL, NY, NJ, and NM)

Profitability Metrics and Valuation

Investment Strategy

Last week the CEO purchased 1.3 million shares for $14.3 million. This was the second largest insider buy since CNBC began producing a weekly insider-buy report. CEO and President Marlow Hernandez acquired 1,327,659 shares, paying $10.88 per share for a total amount of $14.45 million. Mr. Hernandez increased his stake by 701% to 1,516,962 shares with this purchase. 67,327 of these shares were purchased indirectly through a trust.

For more stock-specific articles, check out our Buy List, showcasing some of the top-performing companies in the markets!

Chief Clinical Officer Richard Aguilar acquired 125,155 shares, paying $11.96 per share for a total amount of $1.49 million. The stock has rebounded off its lows in mid-August and insiders have been buying actively in the second half of August. An area of concern that came up with researching the company this weekend was their low rating on Yelp from patients and on Indeed from employees. Explosive growth can be difficult to manage and can translate to a less than optimum experience for patients and employees. Growing pains are not unusual and it would be good to see if the company can address these concerns and focus on quality as it continues to grow.

1-Year Stock Chart

Technicals (as of August 10)

References
Investor Relations Page

MarketWatch

Motley Fool Premium

Seeking Alpha Premium

Disclosure

The Investor Weekly is long Cano Health (“CANO”) either through stock ownership, options, or other derivatives. 

I wrote this article myself, and it expresses my own opinions, I am not receiving compensation for it, and I have no business relationship with any company whose stock is mentioned in this article.

Nothing on this site nor any published commentary by The Investor Weekly is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.