On Tuesday, Citi downgraded shares of agilon health Inc (NYSE: NYSE:AGL) from Neutral to Sell and reduced its price target significantly from $7.00 to $2.50. The firm indicated a lack of confidence in the company's ability to manage Medicare Advantage (MA) costs and renegotiate MA contracts for the year 2025. The analyst pointed to recent Managed Care Organization (MCO) commentary that did not seem promising regarding agilon health's cost control capabilities.
The downgrade follows observations of a rising cost trend, which is expected to result in a shortfall and a downward revision of medical margin projections for the current quarter. This expectation is based on the company's previous quarter performance, where it reported a second-quarter cost trend of 7.3% against a guidance of 6.8%, and projected a 6% cost trend for the third quarter.
The analyst foresees adjusted EBITDA approaching the lower end of the range, around negative $30 million. This outlook is due to disruptions in the MA market, which are anticipated to slow down the improvement of medical costs into fiscal year 2025 and beyond, thereby exerting continued pressure on the company's stock.
In the report, the price target adjustment to $2.50 reflects a single multiple on the analyst's below-consensus Medical Margin assumptions. This suggests a more conservative valuation approach given the challenges agilon health is facing with its cost management and contract negotiations.
In other recent news, agilon health has reported mixed results in its second quarter earnings. The company experienced a 38% increase in total revenue, reaching $1.48 billion, but fell short of the consensus estimate of $1.56 billion. Despite this, agilon health's Medicare Advantage membership saw significant growth of 38% year-over-year, reaching 513,000 members. However, the company's full-year revenue guidance has been revised downwards due to retroactive contract terminations.
Simultaneously, BofA Securities downgraded the company's stock from a 'Buy' rating to 'Underperform' and reduced the price target for agilon health to $3.00. This decision was influenced by the ongoing challenges in the Medicare Advantage sector, which have been particularly acute for agilon health. Deutsche Bank (ETR:DBKGn) also adjusted agilon health's price target to $4.00 while maintaining a Hold rating on the company's stock.
These recent developments reflect a combination of government policy changes, market dynamics, and company-specific issues that have led to a less favorable outlook for agilon health.
Despite these challenges, agilon health reported better-than-expected adjusted EBITDA figures, with a loss of $2.8 million compared to the anticipated $7.9 million loss forecasted by analysts, primarily due to efficient operational cost management.
InvestingPro Insights
Recent data from InvestingPro aligns with Citi's bearish outlook on agilon health Inc (NYSE: AGL). The company's financial metrics and market performance paint a challenging picture. AGL's revenue for the last twelve months as of Q2 2024 stood at $5.28 billion, with a notable revenue growth of 65.62%. However, this growth hasn't translated into profitability, as evidenced by the negative operating income of $251.02 million and a concerning operating income margin of -4.75%.
InvestingPro Tips highlight that AGL suffers from weak gross profit margins, which corroborates Citi's concerns about the company's cost management capabilities. Additionally, the stock has fared poorly over the last month, with a price total return of -27.81%, and is currently trading near its 52-week low. These factors suggest ongoing market skepticism about AGL's near-term prospects.
It's worth noting that 5 analysts have revised their earnings downwards for the upcoming period, indicating a broader consensus on the company's challenges. For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for AGL, providing a deeper understanding of the company's financial health and market position.
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