
FatCamera
Newly listed American Oncology is a healthcare inventory with ample development potential, however remains to be fairly speculative at this level.
Thesis
Over the previous 5 years, American Oncology has grown quickly, and is prone to keep on that trajectory. Nevertheless, it’s a microcap with a considerably unsure valuation and skinny margins.
About American Oncology
This microcap healthcare inventory is a newcomer. It first traded on the Nasdaq on September 21, 2023, after finalizing a enterprise mixture with Digital Transformation Alternatives Corp., a SPAC entity that turned defunct the day after American Oncology started buying and selling.
The cancer-care agency was established in September 2018 and previously 5 years it has grown to 1,500 staff and over 200 practitioners in additional than 75 clinics serving 450,00 sufferers. In a information launch asserting its public buying and selling, it defined,
“AON practices have entry to totally built-in ancillary providers resembling a specialty pharmacy, lab and pathology, radiation remedy, and imaging. These providers promote medical coordination and seamless communication all through all phases of the care course of. AON practices ship high-quality affected person care by sharing assets and experience throughout the community, offering entry to main medical trials, staying on the forefront of medical innovation, and advocating for his or her sufferers and the career of group oncology.”
Competitors
The corporate makes use of a community-care enterprise mannequin that focuses on therapies in clinics and the house of sufferers, slightly than in hospitals. Different companies utilizing this mannequin embody the privately-held U.S. Oncology Community, and OneOncology, which is being acquired by AmerisourceBergen (ABG.DU). Each are considerably bigger than American Oncology. Nevertheless, based on American Oncology’s Investor Presentation of September 2023, the market is huge:
AONC Giant market alternative (AONC Investor Presentation)
Healthcare rivals with comparable market caps embody AirSculpt Applied sciences, Inc. (AIRS), Viemed Healthcare, Inc. (VMD), InfuSystem Holdings, Inc. (INFU), and Talkspace, Inc. (TALK).
Progress
One other slide from the presentation reveals how American Oncology has quickly grown its income over the previous 5 years:
AONC Efficiency (AONC Investor Presentation)
Its profitability, as measured by adjusted EBITDA, is much less predictable. Because the slide reveals, it dropped in 2021 due to a significant capital expenditure. And, anticipate 2023’s adjusted EBITDA to fall additional, due to an extra $24.5 million in transaction prices (bills related with going public) within the third quarter. As soon as these prices wind up, the underside line ought to be extra constant.
What’s the outlook for future development? Fairly sturdy, with what it calls ‘a number of levers’ for development:
4 levers for AONC development (Investor Presentation)
For example, it reported in its third-quarter earnings launch that it had grown its community over the earlier three months by coming into the state of Florida, establishing its first urology observe, and including 19 new suppliers.
Usually, healthcare has been a development trade, and is anticipated to be one in a minimum of the close to future, with growing old populations, new therapies, and extra.
Margins
Like many comparatively small corporations coming into the publicly traded markets, American Oncology’s monetary outcomes are distorted by the comparatively excessive one-time prices. This normalized (no one-time or non-recurring prices) revenue assertion reveals the agency would have been worthwhile with out these prices:
AONC normalized revenue assertion (Creator)
The corporate suffered losses from operations within the third quarter and the primary 9 months, primarily due to transaction bills: $24.6 million in Q3 and $29.9 within the first 9 months. They included authorized, accounting, and consulting charges concerned in its enterprise mixture and going public. As famous, these charges ought to be eradicated or a lot decrease subsequent yr.
It additionally incurred a one-time, non-recurring lack of $4.8 million in reference to the closing. This expense is included with the price of income.
With out these bills, income and working bills would have been constructive within the third quarter: $336.3 million in income and bills of $331.3 million. That’s a revenue of $5.005 million, or a 1.49% margin.
American Oncology did see a $39.0 million income enhance in Q3, however on the similar time, its price of income (together with that one-time expense) rose by $43.2 million. The quantity of affected person encounters elevated its price of income by $13.4 million, whereas its price per affected person encounter was up $24.2 million.
Whichever perspective we use, the web margin is low. Nevertheless, there’s a good chance the corporate can couple its enlargement with price controls to generate higher margins in coming quarters.
Administration and technique
Chief Govt Officer Todd Schonherz has headed American Oncology since its inception in 2017. Previous to that, he was Chief Working Officer at Florida Most cancers Specialists and Senior Vice President and Chief Data Officer for US Oncology.
David H. Gould, the Chief Monetary Officer, joined the corporate in September 2020. Beforehand, he had served as Chief Monetary Officer at ApolloMD and Vice President of Finance and Assistant Treasurer at Cumulus Media, a publicly traded, broadcast media and community firm.
American Oncology additionally has an advisory board with 23 medical professionals.
Its technique going ahead is four-pronged:
4-pronged development technique at AONC (AONC investor presentation)
One of many benefits of a community, as in comparison with a single practitioner or clinic, is the quantity of knowledge it could possibly collect. The extra contributors in its system, the higher the quantity and vary of knowledge that can be utilized to make higher healthcare and enterprise selections. Because it factors out within the presentation, bigger platforms additionally get pleasure from buying scale, broader recruitment, and elevated entry to the ‘varied constituents’ resembling pharma, medical trials, and payors.
Networks are an efficient enterprise mannequin for healthcare companies, and American Oncology ought to be capable to develop right into a rising and worthwhile company.
Valuation
Whereas the corporate has operated for 5 years, it solely started buying and selling publicly a number of months in the past. Which means most information and ratios we use for valuation are unavailable. Additionally, since we’ve got no firm or analyst steerage for 2024, we’ve got to make use of trailing 12-month [TTM] slightly than ahead ratios.
The inventory closed at $6.05 on Tuesday, December 5, 2023. Since going public, shares have traded between $20.50 and $5.77.
The healthcare sector has a mean TTM price-to-earnings or P/E, ratio of 17.87. Utilizing the normalized earnings displayed above, I calculate American Oncology’s P/E [TTM] to be 6.44 ($6.05 / $0.94). That’s almost one-third of the sector median.
The sector’s TTM price-to-sales, or P/S, ratio is 3.64, whereas American Oncology’s is 0.03, indicating deep undervaluation. As this excerpt from SeekingAlpha’s valuation web page for the corporate reveals, it barely registers towards the sector median:
AONC price-sales ratio (SeekingAlpha)
Whereas these two indicators recommend undervaluation, the market has had a distinct view, currently. For seven consecutive days, the worth has fallen, from $8.73 on November 24 to $6.05 on December 5, a 31% decline.
Each ratios inform us the inventory is undervalued. Contemplating that, plus the broad variations in worth since going public, means that risk-tolerant buyers would possibly see the present worth as truthful and enter when the present droop bottoms out.
Dangers
American Oncology is a microcap. As such, it has the potential for sharply greater and decrease costs, however swings ought to average over time because the agency builds a historical past as a publicly traded firm.
As a result of it has little historical past as a publicly traded inventory, buyers have few strong information factors on which to evaluate its current valuation.
Its margins, a minimum of these we’ve got now, are skinny. In the event that they don’t enhance considerably, and generate extra free money circulation for development, the corporate might expend its $90 million money stockpile.
On the similar time, pushing for an excessive amount of development or an excessive amount of too quickly, may additionally lead the corporate into a deadly monetary scenario.
The oncology trade has many rivals that would take away its market share or push costs all the way down to the purpose the place it has low or no internet revenue.
Because it identified in Kind S-1 of October 13, 2023, “A good portion of our income is derived from a restricted variety of medical health insurance and medical group corporations.”
Conclusion
American Oncology went public two and a half months in the past, after working as a personal firm for 5 years. Over these 5 years, it constructed a development platform and the corporate intends to widen the scope of the platform in coming years.
Present margins are insufficient to fund vital future development, nevertheless it does have $90 million in money. Administration has appropriate expertise, and its four-pronged technique ought to be efficient. The shares seem undervalued, however might not have bottomed out but.
For buyers who need an concept for the speculative part of their portfolios, American Oncology is a purchase.