It was a rough start to the week, to put it lightly. As oil prices continued to slide yesterday, the S&P 500 suffered its largest daily decline in three weeks, retreating by more than 3%. Both the NASDAQ and Dow Jones indexes notched losses as well.
However, things could be looking up. U.S. stocks are gearing up today as the U.S. government came to an agreement on a new $484 billion pandemic relief plan, allocating funds to a small business aid program as well as to COVID-19 testing and hospitals.
While challenging at times, research firm RBC Capital tells clients to block out the pandemic-driven noise and focus on the bigger picture. Looking beyond the short-term impacts of COVID-19, the firm believes the healthcare IT space is becoming even more “exciting,” with several long-term tailwinds on the horizon.
“Innovation is accelerating, technologies are becoming more capable, not to mention many of what have been the bigger barriers to value creation—un-digitized data, a lack of data standards, and an unsupportive regulatory framework—are quickly crumbling. There are also two significant forces—payment reform and the empowering of the healthcare consumer—that are dramatically changing the landscape, both of which require the support of a more sophisticated healthcare IT infrastructure,” analyst Sean Dodge wrote in a recent note.
With the analyst initiating his coverage of several healthcare IT names, we wanted to find out more. Using TipRanks’ database, we discovered that three of RBC’s picks have earned Buy ratings from other analysts and boast more than 20% upside potential. Let’s dive in.
R1 RCM Inc. (RCM)
In order to help both acute-care and ambulatory providers better manage their revenue cycles, R1 RCM offers software modules that clients can install and run themselves as well as full outsourcing. With increasing complexity and costs driving providers to get help managing payment processes, RBC sees an opportunity for this company.
According to Dodge’s estimates, only 25-30% of revenue cycle functions are currently outsourced within both the acute and ambulatory spaces. Additionally, 32% of hospital executives surveyed recently by the firm stated that they expect to outsource payment management processes over the next three years.
This creates a significant market opportunity for RCM to capitalize on, and Dodge believes it is well positioned to do so. Expounding on this, Dodge wrote, “While there is some competition in the space, R1 has set itself apart through its: (1) breadth of offerings spanning the ambulatory, acute and post-acute environments as well as ability to service both fee-for-service and value-based models; (2) innovative use of technology to automate labor-intensive processes; (3) track-record of successful deployments and generating value for clients; and (4) now with the inclusion of SCI, more tightly integrated and higher functioning referral scheduling capabilities.”
On top of this, Dodge argues that the value of its technologies is only beginning to come to light. RCM established its Digital Transformation Office (DTO) back in 2018, but in 2020 alone, management thinks the product will provide a $15-20 million EBITDA boost.
With Dodge also citing its more stable earnings stream, expected EBITDA growth rate and better forward visibility on growth as making it a stand-out among its peers, the deal is sealed for the analyst. To kick off his coverage, he published an Outperform rating and set a $12 price target, implying 22% upside potential. (To watch Dodge’s track record, click here)
Like Dodge, other analysts are generally bullish on this healthcare IT stock. It has received 4 Buys and 1 Hold in the last three months, making the consensus rating a Strong Buy. At $13, the average price target is more aggressive than Dodge’s and suggests 36% upside potential. (See R1 RCM stock analysis on TipRanks)
Catasys (CATS)
Next up we have Catasys, which helps insurers identify and better manage the health of patients with both behavioral and chronic medical conditions, the most difficult and costly members. Sure, working with this group of individuals can be difficult, but RBC thinks the company is up for the challenge thanks to its solution, which combines predictive analytics with human engagement.
As of March 25, its effective outreach pool lands at 145,000 individuals, which is up 206% year-over-year. This alone isn’t expected to fuel revenue, but it does expand Catasys’ opportunity, with revenue now depending on how rapidly it can accelerate enrollment.
“Our waterfall analysis—in which we study performance over the past 2-years—shows reality to be a bit slower. That said, even if we project this same slower cadence going forward, we can still get to ~$88 million for the year. Not quite management’s $90 million, but still 150-155% year-over-year growth,” Dodge commented. If that wasn’t enough, the company estimates that another 50,000 individuals will be added to the pool, with it potentially reaching 200,000 in 2020.
Even though Dodge currently doesn’t factor the upcoming launches of OnTrak 2.0, Catasys’ next generation and more tech-heavy engagement engine, or Catasys PRE, an extension of its engagement capabilities beyond its legacy behavioral health focus, into his estimates, these products could drive significant upside in the future.
It should also be noted that CATS made a hefty investment in its tech platform and hired 225 new employees in 2019 to keep up with the outreach pool. With the pace of these investments moderating in 2020, the company believes it will be cash flow positive by the fourth quarter, with a steep margin expansion also slated to take place over the next three-plus years. “Notably, a successful deployment of OnTrak 2.0, given its higher automation, could steepen the ramp,” Dodge added.
Taking all of this into consideration, Dodge started off his CATS coverage by putting an Outperform rating and $35 price target on the stock. This conveys his confidence in Catasys’ ability to surge 17% in the next twelve months.
Turning now to the rest of the Street, it has been relatively quiet when it comes to other analyst activity. Only two other analyst have thrown an opinion into the mix, but the two reviews were also bullish, so the consensus rating is a Strong Buy. In addition, the $29.91 average price target implies nearly 9% upside from current levels. (See Catasys stock analysis on TipRanks)
Allscripts Healthcare Solutions (MDRX)
Allscripts is one of the top healthcare IT vendors in the world, with it developing software and services for a variety of healthcare organizations like hospitals, outpatient physician offices, retail pharmacies and life-sciences companies. While the company has faced headwinds in the past, RBC believes the tide is turning.
Dodge doesn’t dispute that the company has struggled with revenue over the last three years. In 2018, MDRX saw a 6-7% step-down in its organic revenue base, and it followed this up with flat revenue in 2019. Revenue for 2020 is also expected to come in flat as it witnessed a significant number of de-installs in its acute-care segment.
Having said that, Dodge argues that these de-install decisions were made years ago and that based on improving client satisfaction, the situation should be better in 2021. “This coupled with momentum across Veradigm, patient engagement, care coordination, and the community hospital replacement market increases our confidence revenue can re-accelerate back toward the MSDs,” he added.
On top of this, in an effort to spur “significant” EBITDA margin expansion, the company has outsourced its process overhaul. This reflects the new focus that has been placed on realigning operations around growth opportunities and “burgeoning” markets.
Dodge also thinks that its balance sheet provides it with some optionality. While its free cash flow at the end of 2020 is only expected to cover half of its $145 million DOJ settlement, the analyst points out that MDRX still has $480-490 million available to use for M&A and buybacks. “Management’s preference is accretive acquisitions, but even if it settles for repurchases, adding a turn to fund a buyback would lift our 2021 EPS estimate by $0.15-0.20 (or 20-25%),” he commented.
As MDRX trades at a ~4-turn discount to some of its most structurally challenged peers, it’s no wonder Dodge joined the bulls. The analyst initiated coverage with an Outperform call and put an $8 price target on the stock. Should this target be met, a 27% twelve-month gain could be in store.
Looking at the consensus breakdown, 4 Buy ratings, 8 Holds and 1 Sell assigned in the last three months add up to a Hold rating. Its $8.88 average price target surpasses Dodge’s and implies shares could climb 41% higher in the next year. (See Allscripts stock analysis on TipRanks)
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