Agiliti Stock Has Some Upside Left But It Is Best To Wait For Cheaper Entry Point (AGTI)

Recommendation

The healthcare industry in the United States is undergoing rapid transformation, making it increasingly difficult for providers to meet the rising costs and demands of the healthcare system. Agiliti (NYSE:AGTI) addresses this by offering a range of services to help healthcare facilities and networks manage their medical equipment inventory and ensure timely and accurate delivery of necessary hardware. All in, AGTI seems to be on the right side of the secular trend and should grow over the long-term. However, as of its current valuation, I believe it is best to wait for a cheaper entry point.

Business

AGTI is a vital service provider for the American healthcare sector, providing solutions that aid in the maintenance of the healthcare delivery system. AGTI assures that hospitals and clinics have access to life-saving medical equipment by employing a service model.

It’s time for US healthcare to transform

Provider organizations in the United States are adapting to the rapid transformation taking place in the healthcare industry. It’s becoming increasingly difficult for providers to meet the rising costs and rising demands of the healthcare system. Providers can only influence their operations so much, so they focus on what they can manage best. From what I’ve gathered, the management and maintenance of medical equipment is a major focus area for many healthcare facilities and networks.

From high-priced, highly technical devices to low-cost, high-volume devices used in patient care, treatment, and diagnosis, healthcare facilities typically have a lot of reusable capital equipment. From what I’ve seen, providers have a tough time keeping track of their medical equipment inventory. For instance, at any given time, hospitals only use about 42% of their medical equipment. To make matter worse, equipment management workflows break down unintentionally due to operational silos that develop naturally between hospital departments, such as those responsible for ordering equipment, those responsible for cleaning and reprocessing it, and those responsible for delivering it to the nurses and doctors who will use it.

Moreover, as this sophisticated machinery evolves, I expect maintenance costs to increase. In order to keep up with the ever-increasing technical sophistication of these devices and the increasingly onerous regulatory requirements governing their upkeep, technicians need increasingly specific training and expertise. The high cost of replacing medical devices that could have been kept running with regular maintenance is largely attributable to the fact that most healthcare facilities have little the in-house resources and expertise necessary for proper equipment maintenance.

Last but not least, the spike in demand for highly specialized medical equipment that occurs during periods of peak need is directly correlated with seasonal variations in patient volumes in the healthcare system. Since hospitals often experience problems with inventory management and upkeep even when operating normally, they must rely on the availability of equipment to meet patient needs during times of high demand, forcing them to look for other means of acquiring supplies.

Each segment offers an attractive value proposition to target users

There are three segments: Equipment Solutions, Clinical Engineering Services, and Onsite Managed Services.

The success of AGTI’s expansion into new markets will be based on the strength of its Equipment Solutions segment. The Equipment Solution segment, AGTI original rental business, paved the way for the company’s current nationwide presence and customer relationships with the vast majority of hospitals and alternative care health facilities in the United States. The fluctuation in patient volumes and consequently in workloads presents a challenge for users, necessitating adaptable equipment capacity and utilization. One way in which AGTI stands out is by the high level of satisfaction its clients report after using its services, which is in turn based on timely delivery and, where necessary, additional supports like technical assistance and training.

AGTI’s Onsite Managed Services are an expansion of the company’s preexisting customer relationship with the equipment rental side. The timely delivery of fully operational equipment is complicated by issues with equipment workflow and accessibility. Larger providers are unable to mobilize equipment as effectively because they lack the logistics expertise and transportation resources necessary to do so. To combat this, AGTI offers comprehensive managed services that ensure timely and accurate delivery of necessary hardware wherever it needs to be.

Finally, Agiliti’s biggest growth potential may lie in its Clinical Engineering Services offering, which is an additional service it can provide. In order to provide equipment service in the conventional sense (i.e., maintenance and repairs), this model expands upon the preexisting relationship between equipment rental companies and their customers. As more sophisticated devices become available from a wider variety of manufacturers, so do the costs and difficulties associated with maintaining and repairing this equipment. AGTI is able to reduce service costs by consolidating support to a single vendor with a comprehensive offering. Consolidation is crucial because it lessens the complexity and logistics of the facility’s operations by reducing the number of service provider sources.

Nationwide reach and infrastructure in place

When it comes to personnel, infrastructure, and vehicle service, AGTI excels on a national and regional scale. In my opinion, AGTI is able to successfully compete for large national contracts thanks to its extensive network of facilities, which also drives regional and local growth. In addition, AGTI’s ability to respond quickly to demand/supply shifts brought on by emergency events like hurricanes gives the company a competitive edge.

AGTI has a nationwide presence and employs a large number of experts in various fields to work directly with customers, including technical, clinical, and surgical experts. These professionals are in charge of increasing profitability, productivity, and patient outcomes. The company employs over a thousand service technicians, a few hundred repair specialists, and a few hundred sales account managers. This large workforce has been built over the course of 80 years, requiring significant infrastructure investment. This infrastructure and expertise give AGTI a competitive advantage in the market, allowing them to serve large and sophisticated acute care hospitals while also providing them with access to the most advanced technologies for the benefit of patients.

AGTI HHS contract delivers

On December 14th, AGTI and HHS announced a new agreement for the management, storage, and preventative maintenance of ventilators and powered air purifying respirator systems. This new agreement will begin on August 23, 2023, and will last for 4 years and 6 months at a contract sum of up to $491 million. Consequently, the current contract, which was set to expire on February 27, 2023, has been extended by up to six months.

Although this result was anticipated, it is still impressive in scope and duration through 2028, and, in particular, the new contract offers great visibility to approximately 10% of AGTI revenues.

Valuation & model

Using consensus estimates, I value AGTI at $17.49. AGTI should expand by differentiating itself through its value proposition and capturing market share. While there may be some short-term headwinds from post-covid normalization, I believe AGTI will do well due to the onboarding of larger and longer-term contracts.

However, the AGIT share price is approaching fair value at this point (10% range). Given that it is already valued at close to its historical multiple range, it is difficult to argue that valuation will rise. The key question here is whether AGTI can grow faster than expected. I’m sure there are other options, but the lack of visibility led to my model of mid-single-digit growth (historical growth rates).

Risks

Competition

A threat to AGTI’s market share and revenue is the possibility that rivals like Steris, Trimedix, Hill-Rom, and others will increase their offerings and become more competitive in AGTI’s service categories.

Leverage

AGTI’s high debt-to-EBITDA ratio places a significant strain on the company’s financial position. The pressure on AGTI to increase profit margins remains even though there are currently no indicators of insolvency or breach of covenants. This high debt ratio may be a valuation overhang due to the current interest rate climate.

Summary

For the time being, I think it’s best to hold off until a cheaper entry point.

Providers are finding it challenging to keep up with the healthcare system’s rising costs and demands as the healthcare industry in the United States undergoes rapid transformation. To combat this issue, AGTI provides a variety of services designed to streamline the process of managing medical equipment inventory and guarantee the precise and timely delivery of said hardware to healthcare facilities and networks.