Revisiting Signify Health

Jan. 09, 2022 5:05 PM ETSignify Health, Inc. (SGFY)ACCD, ELV, ARKG, ARKK, CI, ONEM, TDOC, VEEV17 Comments10 Likes

Summary

  • Back in May 2021, I wrote my first introductory article to Signify Health, an up-and-coming healthcare platform.
  • Attempting to bridge the gap between home and facility care infrastructure, Signify’s customers are not patients, but care providers looking to leverage an innovative tech platform.
  • While the IPO timing was not great, and market pressure has brought the stock down along with peers in small cap growth, the fundamentals remain strong.
  • With this, I find the bullish long-term case even stronger at these levels, and recommend the stock long term.

Home caregiver helping a senior man standing up at home

FG Trade/E+ via Getty Images

The Leading Innovative Health Platform

Signify Health (NYSE:SGFY) is a unique, well positioned, and in my opinion, leading company in the burgeoning home care segment. While headlines are dominated by virtual care providers like Teladoc (TDOC) or One Medical (ONEM), Signify offers a safer exposure to this future-focused segment. This is because rather than being exposed directly to patients, Signify Health is a platform utilized by health care providers instead, in order to bring their services to the modern era. While home care and remote patient monitoring is one capability, Signify also allows providers to have far more optimized clinical and administrative capabilities. Since SGFY is not exposed to consumers directly, volatility based on economic or other adverse events (COVID, lockdowns, inflation, etc.) is reduced compared to peers, and I find this will be favorable for investors. However, this comes with slower growth, but perhaps profitable long-term growth, a la Veeva (VEEV), is in Signify's future. For a complete dive into the company platform and services, please consider reading my introductory article, here.

Image: Signify Health Website. A brief summary of the Signify platform capabilities.

Image: Signify Health Website. This image discusses how SGFY provides targeted support to each client and patient group.

Changes Since Last May

Unfortunately, the share price of Signify Health has fallen 50% since the release of my article. However, I did note that many IPOs are volatile and have a habit of falling significantly over the next few years. Although, this drop is far beyond what I imagine was possible, and many investors are concerned about the company as an investment. Therefore, in the rest of this article, I will discuss why I find the bullish case remains, and that the opportunity presented to us is significant.

First and foremost, growth has remained elevated, and quite impressive with a 42% increase YoY of revenue for the first 9 months of 2021 compared to the year prior. Meanwhile, and one reason why Signify stands out against peers, is the fact that Adj. EBITDA grew faster than revenues, at 52% YoY for the first 9 months of 2021. Strong demand for Home & Community services, which saw a total volume of ~488,000 events, drives this profitability compared to ~362,000 the year prior.

Image: Q3 Earnings Presentation. One of the main bullish aspects of the company, increasing growth AND earnings.

One risk development that arose over the past year is the current corporate espionage and IP theft trial against a former Carecentrix executive who now works for Signify Health. This executive is currently not able to work for Signify as the trial is underway, and this may eat away at earnings with steep legal fees. While I personally believe Carecentrix (an at risk company, which Anthem (ANTM) and other PE chose not to acquire due to their loss of a Cigna (CI) contract [over 50% of revenues] is just attempting to glean some sort of financial benefit from the lawsuit, I do not believe there will be long-term impact to the company overall. However, it is in the hands of the court system now, and the law must be upheld if necessary. There are so many catalysts outside the jurisdiction of one executive, that I find in the end any injunctions will be minor.

Strong Q3 Maintains Fundamental Strength

The Q3 report was a beat across the board, highlighting incredible growth for the company, even after a strong 2020. This young company still has plenty of organic growth expansion to see, and this 30-40% growth rate should propel the stock forward nicely. Not to mention this company is far more profitable than peers, and I will show some comparisons later on in the article. It will be important to watch Episode of Care Services revenues, as the pandemic seems to be having quite an impact, and getting worse with Omicron. However, next quarter will be favorable with a BPCI-A lump-sum payment.

The Bundled Payments for Care Improvement (BPCI) initiative was comprised of four broadly defined models of care, which linked payments for the multiple services beneficiaries received during an episode of care. Under the initiative, organizations entered into payment arrangements that included financial and performance accountability for episodes of care. These models aimed to increase quality and care coordination at a lower cost to Medicare.

Image: Q3 Presentation. Summary of Q3 earnings.

Image: SA. Positive GAAP earnings is a rare site in small growth companies, not to mention a large beat of expectations.

Future Expectations

Each quarter, guidance has risen across the board, whether revenues, earnings, or individual evaluation volumes. Demand for in-home-evaluations has risen dramatically, due to both quality of care and the pandemic. This is a high margin revenue segment, hence why earnings are set to increase with revenues. However, the pandemic is hurting the company in other fields, especially acute care episodes as hospitals are crammed full of COVID patients. Hospitals here in California are now cramed, and some even sending patients elsewhere. This is despite the fact that COVID cases are now far less extreme than the beginning of the pandemic. However, staff shortages (quarantining, etc), and the sheer volume of patients is leading to issues across the board.

The pandemic is a double-edged sword for Signify, but generally favors high margin in-home care. Upon normalization of the healthcare environment, whether it takes one or ten years, I expect equal growth on each front. However, with size and their exposure to slower moving healthcare clients, I believe growth will settle below 20%. The key catalysts will be the uptake of home monitoring and care, and secular aging trends. As people live longer, but are still in frail states over that time, home care services will likely be needed and see growth. While it is a morbid and unkind form of growth to bank on, Signify should be able to aid those in need with high quality and well optimized solutions.

Image: Q3 Presentation. Expectations keep rising through the year, and every quarter is a beat. A positive sign!

The ARK Curse

One reason why I am not a fan of ARK funds (ARKK) (ARKG) is due to the fact that they decimate many small cap companies with the sheer amount of capital these funds must invest, especially during the extreme inflows of 2020/early 2021. However, when the ARK ETFs underperformed over the past year, outflows reached an extreme level, and brought down many of the small caps with it (beyond what would be normal for the stock on its own). These investments or divestments are one of the reasons for the poor performance over the past six months since the IPO last winter. As long as SGFY remains a holding in ARK funds, this curse shall be present, and only upon an increase in market cap will the effects be less impactful to shareholders. Thankfully, the favorable climate of healthcare and solid financial fundamentals of Signify will be able to grow the company swiftly over the decade.

Considering historical performance and future expectations, I expect the share price can see a 25% CAGR return over the next decade. Whether due to increased profitability, value expansion, and maintained growth over 30%. In turn, this should also decrease AKR's 10% ownership levels by approximately 10% per year, this should reduce ARK's overall share to about 3.5% or less. With that, inflows and outflows should be less of an issue at that point. This allows the fundamentals to truly drive performance, rather than a popularity contest.

Image: Q3 Presentation. Many favorable catalysts will propel this company forward in the short and long term.

Comparison To Peers & Valuation

The whole healthcare market has been down for the past six months, but SGFY has performed poorly as discussed. In my prior article, I made most of my comparisons to tele-health providers such as Teladoc, One Medical, and Accolade Health (ACCD). Now, however, I find that a name such as Veeva may shed more light on the potential performance of Signify, albeit slightly slower in overall growth rate. Current performance of SGFY is linked to the smaller more speculative names, but the current valuation is far removed from all peers.

In fact, the valuation (Price to Sales) is only 2-3x that of healthcare providers while revenue growth is 3-4x or more. Although the entire industry is at a strange place at the moment, and it is hard to find sufficient comparisons against SGFY. It will be important to try to find the tipping point for the share price, as if growth continues the valuation will too. As SGFY is currently at less that 3x P/S, I expect expansion to occur sometime in 2022 as the lawsuit gets figured out, and growth is maintained beyond the pandemic.

Chart: The recent performance of a few innovative healthcare names, including Signify Health. All have seen a steep downward trend of late.

Chart: The valuation of Signify is far below other names in the field, and I find this abnormal due to the strong financial performance of Signify. While I do not expect a valuation such as that with Veeva, reaching similar levels to TDOC and ONEM may be possible in the future.

Conclusion

I will end this article with the same sentiment I had in my introductory article.

When considering the stable growth over the past three years, positive healthcare industry climate, and strong financial state, I find that Signify is a solid buy for a long-term growth portfolio.

Although, it will be important to be mindful that the company will be different as the pandemic subsides. Further, when you consider the large drop in valuation and share price as of the new year, the bullish case is even stronger. I had recommended this company as the best risk adjusted bet in the burgeoning innovative healthcare market, and will continue to feel this way as the fundamentals are just getting stronger.

With almost three quarters of a billion dollars in cash on the sidelines, and only half that of debt, perhaps a significant acquisition is in the books. While this may disturb the share price on announcement, I am sure the company knows what will work to grow the company into the future. The downward trend is still underway, so be careful that you do not go all out, in case the trend continues. However, I am looking to make this one of my major holdings for 2022, and hope to see an upward move soon.

Thanks for reading and feel free to share anything in the comments below.

This article was written by

Hello, I am an individual investor with an interest in bringing diversification of viewpoints to stock analysis and investing. This brings to point the Japanese proverb 他山之石 -ta-zan-no-ishi- which translates to "another-mountain's-rock" and denotes the importance of diversifying the sources of your knowledge in order to gain the advantage of multiple perspectives. Further, a rock represents the foundational aspects of the world a mountain supports, signifying the importance of understanding the simple fundamentals in order to succeed. As such, I cover a wide range of assets in order to find the best of every type of investing. Please consider following so we can continue down this path of knowledge together, and hopefully, I am able to provide some novel insights for you with every article. Thanks for reading.
Follow

Disclosure: I/we have a beneficial long position in the shares of SGFY 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.

Recommended For You

Comments (17)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.