Piper Sandler analyst Jessica Tassan downgraded Cano Health Inc (NYSE:CANO) to Underweight from Neutral with a $5.00 per share price target, down from $8.50.
As a result, Cano stock price is down about 8% heading into the New York open today.
Despite cheap relative valuation to peers, Tassan says he can't recommend CANO shares to investors. Among other things, the analyst notes that an FY22 capital allocation prioritizes revenue retention over growth.
On the 4Q21 call, management signaled that affiliate tuck-ins would be FY22 investment priority #1. CANO will pare back FY22 de novo builds vs. 54-59 originally forecast. We believe this year's ramping investments in affiliate tuck-ins will draw attention to CANOs practice of consolidating affiliate financials. Because affiliates are already consolidated, tuck-in M&A yields effectively no incremental membership, revenue or adjusted EBITDA. It is an investment in retention, not growth. "We do not think this dynamic is widely appreciated, but expect heightened scrutiny in FY22," Tassan said in a client note.
Tassan estimates that owned providers generate 50% of CANO's P&L, with the remainder generated by affiliated providers.
He further expects that owned providers will deliver $1.72 billion of revenue in FY23E and $145 million of adjusted EBITDA.
Overall, the analyst says that the fundamental outlook is uniquely challenged, hence the downgrade to Underweight.
By Senad Karaahmetovic