Evolent Health (EVH), like many other health care-related companies, is relatively insulated from recessionary risks. But it's not just a safe haven. Analysts expect booming growth for the provider of health care administrative services and software amid the current inflationary environment. EVH stock, despite a recent setback, has performed well.
XWith labor costs soaring and people using health care services more as the Covid pandemic wanes, controlling medical costs is crucial. That's where Evolent Health comes in.
The Arlington, Va.-based company helps health care providers and payers control costs and financial risks. Evolent Health works with Medicaid, Medicare and private health plans. The company reports that its programs support more than 3 million patients in the U.S. across all lines of business.
Evolent works with more than 1,000 primary care providers and specialists in the country and is partnered with health insurance giants Humana (HUM) and Aetna, owned by CVS Health (CVS).
Evolent Sees 'Increased Urgency' For Its Services
"We believe the macro environment continues to be a tailwind for growth across our enterprise, with elevated medical expenses and inflationary pressures across the country creating increased urgency for health plans and other risk-bearing entities to drive quality of care, while lowering their overall cost burden, which is the core proposition of our value-based care solutions," said Evolent Health CEO Seth Blackley during the first-quarter earnings call on May 4.
Founded in 2011, Evolent Health began trading on the NYSE in 2015. It posted annual losses until eking out an adjusted per-share profit of 2 cents in 2021.
Analysts expect Evolent earnings will mushroom by 1,350% in 2022 to 29 cents a share, followed by a 90% jump to 55 cents in 2023.
Evolent Health holds the No. 1 rank among its peers in the Computer Software-Medical industry group. Privia Health (PRVA) and Simulations Plus (SLP) are also among the group's highest-rated stocks.
Evolent made its way onto the IBD 50 Stocks To Watch list last month and was profiled on June 22.
EVH Stock Breakout Fails
Evolent Health stock broke out on July 7 past buy points of 32.64 and 33.24 in heavy volume. But shares plunged about 6% on both July 11 and 12, quickly tumbling more than 8% below both entries and hitting the automatic 7%-8% sell signal. EVH stock rebounded strongly from the 50-day line, slashing weekly losses, but likely needs to set up again.
The relative strength line for Evolent Health hit multiyear highs in early July, reflecting the stock's outperformance vs. the S&P 500 index. But the RS line also has stumbled this week.
EVH stock has a best-possible Composite Rating of 99. Meanwhile, it has a 96 Relative Strength Rating, an exclusive IBD Stock Checkup gauge for share price movement with a 1 to 99 score, with 99 tops. The rating shows how a stock's performance over the last 52 weeks holds up against all the other stocks in IBD's database. The EPS rating is 76.
Health Care Stocks
Health-related stocks have been the leading area for the market. Like Evolent Health, they struggled to start the week but have bounced back. The Health Care Select Sector SPDR Fund (XLV) fell just 0.4% for the week, well off Thursday's lows.
UnitedHealth Group (UNH) earnings comfortably beat views on July 15, kicking off results for health insurers and medical services firms generally. UNH stock rose 5.4% Friday, breaking out. Shares had fallen earlier in the week but bounced from the 50-day line on Thursday.
PRVA stock, extended from the prior week's breakout, rebounded to climb 4%. Drug giant Merck (MRK) is moving up toward highs. SLP stock cleared a buy zone.
Medical staffing firm Cross Country Healthcare (CCRN) has run higher for nine straight weeks.
Strong Fundamentals
Evolent Health's revenue grew 38% in the first quarter to $297 million, the best gain in years. EPS swung to a 12-cent profit from a year-earlier loss of 1 cent, after jumping 167% to 8 cents in Q4 2021. The company is projecting Q2 revenue of $290 million-$305 million. Analysts predict second-quarter EPS of 4 cents vs. a year-earlier 2-cent loss, according to FactSet.
Evolent Health expects full-year 2022 revenue of $1.16 billion-$1.21 billion. Adjusted EBITDA should be $85 million to $95 million.
The company reported strong first-quarter revenue growth in its administrative and clinical health segments, 26% and 46%, respectively.
Evolent Care Partners is the administrative segment, providing software to insurers, hospitals and other providers to rein in costs. New Century Health is the clinical health segment, finding ways to expand coverage and members while controlling expenses.
Evolent has announced agreements with Blue Cross Blue Shield of North Carolina, Florida-based AvMed and Molina Healthcare (MOH).
Evolent Expands Portfolio
The company is primarily targeting oncology and cardiology services. However, Evolent is beginning to put an emphasis on musculoskeletal disorders, which are injuries and issues with muscles, nerves, tendons, joints, cartilage and spinal discs.
In late June, Evolent agreed to acquire IPG, a provider of surgical management technology for musculoskeletal conditions, from asset manager TPG (TPG). Potential contingency payments could raise the $375 million deal to $462 million.
Blackley, in a statement, said IPG will expand Evolent's customer base and "adds unique clinical value and an enhanced financial profile to support our mission."
Before the acquisition, Cowen analyst Charles Ryhee raised the EVH stock price target to 50 from 48, maintaining an Outperform rating. Ryhee said he believes Evolent Health is best positioned to "provide above-market revenues and EBITDA growth" with its varied value-based care services.
He added the company has vast opportunities to expand current partnerships via upsells and new geographies, sign new deals with health plans looking to achieve cost savings, and add specialties to its portfolio.
U.S. Health Spending To Increase
It's a good time to be in the health care cost reduction business. U.S. health care spending will swell to $6.2 trillion by 2028, according to the Centers for Medicare and Medicaid Services (CMS).
In 2020, health care spending grew 9.7%, reaching $4.1 trillion or $12,530 per person. Federal spending soared 36%, largely in response to the Covid-19 pandemic, according to CMS.
The Centers for Medicare and Medicaid Services estimates national health spending will grow at an annual rate of 5.4% through 2028. The health share of the U.S. economy is projected to increase from 17.7% in 2018 to 19.7% in 2028.
Meanwhile, the global health management market should more than double from $24.7 billion in 2021 to $51.2 billion by 2028, according to a recent report from Zion Market Research.
Canaccord Genuity analyst Richard Close wrote in a May 9 note that Evolent Health is one of his 2022 focus stocks. Close based this on "new partnership momentum" and "organic revenue growth trends above the midteens growth target" within the market. At the time, he raised EVH's stock price target to $45 from $40.
Covid-19 Emergency Extension
The Biden administration should extend the Covid-19 public health emergency order on July 15, Bloomberg has reported. The Department of Health and Human Resources has repeatedly extended the order since it was first issued in 2020.
The public health order has given millions of people access to health insurance and telehealth services. Some 13 million to 16 million Americans have received health coverage under Medicaid via the order.
This has been a windfall for EVH and other health-related companies.
Pandemic Boost Will End, Eventually
Revenue increased 21% to $1 billion in fiscal year 2020. Sales dipped to $908 million in fiscal year 2021 but were still up 7% from before the pandemic.
Blackley told investors in May that EVH membership was up an estimated 2%-3% at the end of 2020. He said this percentage point increase was more "than it might have been absent the public health emergency."
The Families First Coronavirus Response Act of 2020 required states to implement a continuous coverage requirement to ensure workers who lost their jobs, or employer-provided coverage, would have insurance through Medicaid. The legislation also provided a temporary increase of 6.2% in federal Medicaid payments so that states could maintain Medicaid enrollment.
EVH expects to lose some membership when the public health emergency orders expires, but not until six months to a year after the fact.
"We have incorporated that into our guidance; we do expect to see it," Blackley said on the Q1 earnings call. "We don't think it will be that big of an impact given that 2%-3% initial impacts to the positive."
Please follow Kit Norton on Twitter @KitNorton for more coverage.
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