- 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 »
"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.
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.
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.
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.
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.
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.
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.
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.
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
Author's note: I present and update my best small-cap Busted IPO stock ideas only to subscribers of my exclusive marketplace, The Busted IPO Forum. Try a free 2-week trial today by clicking on our logo below!
This article was written by
The Busted IPO Forum is an investing group led by Bret Jensen, Chief Investment Strategist of Simplified Asset Management. Along with his team of analysts, Bret focuses on stocks that have been public for 18 months to 6 years, and that are significantly under their offering price.
The Busted IPO Forum: A model stock portfolio of attractive busted IPOs, trade alerts, deep dive analysis, a weekly option play idea and live chat.
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.