The recent sell-off has pummeled most of the market, but the small-cap healthcare tickers have been under pressure for over a year and are starting to trade at cut-rate valuations. And so, I have been on the lookout for healthcare tickers that have experienced unjustified selloffs and are undervalued for their fundamental outlook. Healthcare technology tickers have been one of the hardest-hit industries on the market and MultiPlan Corporation (NYSE:MPLN) appears to be trading at a 70%+ discount based on certain valuation models. The ticker is not risk-free, however, the company's expertise in data analytics and cost management has produced an impressive track record for growth and has positioned the company to continue that record in the coming years. As a result, I believe MPLN is worthy of a speculative investment and a spot in the Compounding Healthcare "Bio Boom" portfolio.
I will provide a brief background on MultiPlan and will go over the company's recent performance. In addition, I discuss the company's valuation and outlook. Furthermore, I will point out some downside risks that investors should consider when initiating or managing a MPLN position. Finally, I reveal my plans for establishing a MPLN position in 2022.
MultiPlan offers data analytics and technology solutions to the U.S. healthcare system to improve cost management, payment, and revenue integrity. MultiPlan works with in excess of "700 healthcare payers in the commercial health, government and property and casualty markets" including Blue Cross and Blue Shield plans, third-party administrators, bill analysis firms, as well as Taft-Hartley plans.
The company's algorithms services help reduce medical costs by detecting over-charges on claims and help negotiate reimbursement. The company also provides solutions payment and revenue integrity services by recognizing and eliminating unsuitable and redundant charges paid during the claim. In addition, MultiPlan has health benefit plans with reference-based pricing that are based on reference points to help involve health plan members and providers.
Using their sophisticated technology, MultiPlan can help payers manage the cost of care and improve their competitiveness.
MultiPlan recently reported their Q1 earnings report that revealed a beat on revenue and EPS. The company surpassed their expectations on revenue and adjusted EBITDA. MultiPlan processed roughly $31.7B in claim charges during the quarter and identified ~$5.6B in potential cost savings. As a result, the company's Q1 revenues came in at $298M, which is up 16.9% year-over-year.
The company's Q1 adjusted EBITDA increased 17.9% year-over-year to $225.4M. Net cash provided by operating activities was $194.9M, up from $170.9M in Q1 of last year. The first quarter's free-cash-flow was $170.5, compared to $152.8M in Q1 of 2021. This cash flow bolstered the company's balance sheet to have $350M in cash up from about $185M in the fourth quarter of 2021.
Q1's growth was driven by 24.8% growth in analytics-based services with 17.5% growth in payment and revenue integrity services. The company was able to accomplish this growth while employing the recent No Surprises Act "NSA" for their customers. This demonstrates the company's operational ability and value to their payer customers. Moreover, this performance has setup MultiPlan in a strong position to maintain growth for the foreseeable future.
Looking ahead, the company is maintaining their 2022 guidance with revenues expected to come in between $1.16B and $1.2B. In addition, the company is expecting their adjusted EBITDA to be around $850M-$875M and cash flow from operations to be in the range of $380M-$420M.
Beyond 2022, the Street expects the company to report steady revenue growth over the next couple of years.
The Street's revenue estimates might only be single-digit revenue growth, however, it should transfer into double-digit growth in EPS.
So, it looks as if the company is going to be recording significant growth in the coming years, yet, the stock is trading at discount for many valuation metrics. For example, the stock is trading at a 2.53 forward price-to-sales for their 2022 revenue estimates, which is significant under the sector's average of ~5x. What is more, the company's forward P/E multiple is 23.7, which is above the sector median of ~20x, however, that multiple is projected to improve in the coming years. Moreover, the company's current price-to-cash flow is about 7x, which is drastically under the sector's median of ~18x.
In terms of valuation models, MPLN's DCF five-year growth exit puts the ticker at ~$8, which is a 71% upside and 82% for the ten-year. My DCF ten-year EBITDA exit is 150% at roughly $12 per share.
Indeed, these are just projections, but MultiPlan remains fixated on driving continual long-term growth by improving its product offerings to payers, spreading into new payer customer cohorts, and escalating its platform to attend the needs of their growing customer base. Considering these points, I am confident to say that MPLN is capable of maintaining their growth streak and will be able to hit the Street's estimates. Therefore, I consider MPLN to be undervalued for both its near-term and long-term prospects.
Despite the company's prospects, investors need to consider some potential downside risks. First and foremost, the company is carrying roughly $4.618B in debt, but only has $350.83M in cash. MultiPlan is a very profitable company and should be able to handle the debt, nonetheless, debt is always a looming risk that can weigh down the share price until it is addressed.
Another concern is the company's ownership with less than 1% of the shares ($22.17M market value) being held by the public, with nearly 50% being held by PE/VC firms.
This creates an investability risk, which caused FTSE Russell to lower MPLN's investability weight from 95.9% to 50.6%. The low trading volume can make it difficult for investors to get in and out of positions at the desired price.
An additional risk comes from the healthcare information technology industry falling out of favor with the market and their stocks getting beat down regardless of their fundamentals. MPLN appears to have been caught up in this sell-off and it is possible that the share price will continue to move lower or sideways with its peers irrespective of the company's progress.
I see MPLN as a great opportunity to add a high-quality HCIT ticker to the Bio Boom portfolio. Although the company is profitable and is growing, I am not ready instantly place it in the Bioreactor portfolio and begin accumulating an upsized position in a fresh ticker with a number of risks.
My plan is to establish a pilot position in the near term to take advantage of the basing action that has been occurring on the Daily Chart since November of 2021.
MPLN Daily Chart Enhanced View (Trendspider)
Once I have established a position, I will continue to make small quarterly additions as long as the ticker is trading under $5.50 per share. On the other hand, I will look to book profits of around $7.30 and $9.20 per share in order to convert my position into a "house money" state.
I don't expect to amass a large position in MPLN at this time, however, I am looking to maintain a position for at least five years in anticipation the company will continue to report growth and I will move the ticker into the Bioreactor growth portfolio.
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This article was written by
After years of working in the medical field, I have developed a passion for biotech and lifesaving therapies. Now, I am a full-time healthcare investor who is in search of the next breakthrough therapy, device, or pharmaceutical. My trade focus is around catalysts and potential acquisitions. In addition, I provide a marketplace service, Compounding Healthcare through Seeking Alpha.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Short position through short-selling of the stock, or purchase of put options or similar derivatives in MPLN over the next 72 hours. 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.