Bright Health Group: Examining A Dumpster Fire

Summary

• Today, we take our first look at Bright Health Group.  This company just came public in June, but the stock has eviscerated shareholders to date.
• We examine what has become a 'dumpster fire' for the shares and determine whether the huge pullback in the stock should be bought.
• A full investment analysis follows in the paragraphs below.
• Looking for more investing ideas like this one? Get them exclusively at The Busted IPO Forum. Learn More »

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"I like work: it fascinates me. I can sit and look at it for hours.”― Jerome K. Jerome

Today, we examine a small cap stock that has been an absolute 'dumpster fire' for its original shareholders since it came public late in Spring of 2021. This is another great example of why I never buy IPOs when they first debut on the market. So many quickly become 'Busted IPOs' and can be bought for 30 to 50 cents on the dollar to their debut not that long after initial enthusiasm for the shares gets replaced by reality. So is this particular 'train wreck' buyable now? We attempt to answer that question via the analysis below.

Company Overview:

Bright Health Group (NYSE:BHG) is based out of Minneapolis. The company offers individual and family, Medicare, and employers insurance plans. Bright Health also operates and manages its own as well as affiliated risk-bearing primary care clinics. After the big decline in the stock in the second half of 2021, the shares go for around $3.50 apiece and sport a market capitalization just north of $2.1 billion.

Source: November Company Presentation

Recent Events:

The company reported third quarter results on November 11th. Revenues rose more than 200% from the same period a year ago to nearly $1.1 billion. Unfortunately, this sales growth did not generate profits as the company posted a loss of 48 cents a share, almost triple the amount of red ink the analyst community was expecting.

Source: November Company Presentation

The company saw good growth from all of its business lines.

Bright HealthCare Commercial members grew 305% on a year-over-year basis to over 600,000. It Medicare Advantage population almost doubled to approximately 114,000. Finally, its NeueHealth business where it is making significant investments (more on that in the sections below) grew nearly 800% to 170,000 members.

The culprit for the big quarterly profit miss was the company's Medical Cost Ratio or MCR. This ratio stood at ~103% for the third quarter which was up from ~90% in the previous year’s quarter and the first nine months of the year. Leadership stated that the increase in costs was due to 'the impact of COVID-19 related costs and a decline in premium revenue due to a failure to capture risk adjustment on newly added lives'. Management expects its enterprise MCR to be in the 92% to 93% range for all of FY2021.

Source: November Company Presentation

On its third quarter conference call, leadership provided revenue guidance of between $4.1 billion and $4.2 billion for FY2021. Just over three weeks later, management updated its guidance to include projections for FY2022 revenue of $6.5 billion. This was significantly above the consensus at the time, and the growth will be led by the company's NeueHealth and Bright HealthCare businesses

Analyst Commentary & Balance Sheet:

Analysts have not viewed recent events with 'rose-colored' glasses. Since early November, Morgan Stanley ($4 price target), Goldman Sachs ($5 price target) and Citigroup ($10 price target) have all either downgraded or initiated the shares as a Sell or Hold. RBC Capital ($9 price target) and Bank of America ($10.50 price target, down from $13 previously) have maintained Buy ratings. Morgan Stanley did upgrade the stock to Outperform, but only placed a $6 price target on the shares.

Source: November Company Presentation

One insider seems a bit more sanguine about the company's prospects judging by the almost $900,000 worth of stock he bought on December 10th (which seems to be part of the capital raise outlined below). A snapshot of the company's balance sheet at the end of the third quarter is presented in the graphic above. In early December the company announced its plan to raise an additional $750 million of capital by issuing preferred stock with a 5% dividend yield that can be converted to equity at $4.55 a share, 25% above where the stock was trading at the time.

Source: November Company Presentation

This will help fund the expansion of the company's NeueHealth business which is expected to post $2 billion in revenue in FY2022 as it starts to participate in CMS's Innovation Direct Contracting program this year. The company will add at least 25 new clinics Florida, Texas, and North Carolina to bring its total amount of company owned clinics to approximately 70. In theory (see above), this should help bring the company's MCR down over time.

Source: November Company Presentation

Verdict:

The Omicron variant to date is much less severe than any versions of Covid that have come before. It spreads very easily, which should trigger significant natural immunity, which with some luck will help make Covid endemic at some point in 2022. This should be a nice tailwind for this part of the healthcare market and bring down costs.

Source: November Company Presentation

Analysts expect Bright Health to roughly cut its losses in half in FY2022 based on the current consensus. The company has recently taken care of its capital needs and expects over 50% revenue growth this year led by the expansion of its NeueHealth business.

Bright Health seems like an interesting growth story to keep an eye on. Obviously after its big increase in MCR during the third quarter which resulted in a much bigger loss than anticipated, puts the company squarely in 'show me' status for investors. Therefore, I am taking only a small 'watch item' position in BHG using covered call orders at this time.

"All happiness depends on courage and work.”― Honoré de Balzac

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BHG 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[CJlove4all]

What happens when this falls below $1 on year-end tax loss selling??

Will they have to delist after x amount of time below $1 from certain exchanges for not meeting requirments??

[CJlove4all]

Never forget, Facebook summarily dropped 50% post its IPO before making folks wealthy--

Numbers were incredible yesterday

[Uncle Billy]

It seems that someone relit the dumpster fire. I paid $2.90 for some.

[Uncle Billy]

I'm surprised that this article hasn't generated more comments. The preferred stock sale seems to indicate that the buyers have confidence in the company's vision for integrated care.

[Neil Clyne]

What are the odds this company goes under.? Or how much lower can it go?

[itmforevuh]

what milestones will make you increase your position?

[dgiinvestor]

Thank you!

[Busted IPO Forum]

@dgiinvestor YW. All the best in 2022.