Aveanna Healthcare Stock: In Need Of Help (NASDAQ:AVAH)

At the start of the year, I concluded that I could not care for shares of Aveanna Healthcare (NASDAQ:AVAH). I believed that valuations were rich since its IPO, as lackluster operating performance left me very cautious. I could not rhyme this performance with a desire to pursue dealmaking in a rather aggressive manner.

Background

Aveanna offers a so-called home care platform focusing on complex and high-cost patients, part of the most challenging subsections of the healthcare system. The key factor and target are to avoid the high costs related to hospital settings (certainly intensive care) while maintaining quality of the patients in a range of disciplines.

Technology is vital in achieving this, but moreover, labor remains a key determinant in the health business. At the time of the public offering, the company has grown the business to $1.5 billion in revenues, generated from 250 different locations, as aggressive growth has in part been fueled by acquisitions.

The company went public at $12 per share as recently as April 2021, with pricing coming in far below a preliminary offering range at the time. At the offering price, Aveanna supported a $2.8 billion operating asset valuation, based on a business which posted sales at $1.5 billion in 2021 (or $1.7 billion if deals made in 2021 were included). The company posted an operating profit number of $82 million that year, yet the company was quite aggressive in making adjustments, as the valuations remained very high for what appeared to me an established business.

Given the roughly 5% operating margins, I believed that there was not that much room for margin expansion, given the labor-intensive nature of the business, translating into a 34 times operating earnings multiple, while leverage came in at 3.6 times EBITDA. Not buying the innovative practices claim, I found this to be a traditional business as valuations were far too steep for me to get involved at the time of the offering.

This argument was reiterated in January, at a time when shares fell to just $6 per share. The reason for that is simple: lackluster operating performance. After guiding for sales at $1.75 billion and EBITDA of $185 million at the time of the offering, it was quite clear that the company could not deliver on this as the ¨adjustments¨ were high.

With leverage ratios increasing on the back of worsening EBITDA profile, it was puzzling that the company acquired Accredit Home Care in a $180 million deal by year-end 2021, as well as made a $345 million acquisition for Comfort Care. Both deals looked a bit rich in terms of sales multiples as these transactions meant that a near 4 times leverage ratio would increase to 5.5 times on a pro forma basis.

Given the situation in which the company found itself, I was extremely cautious, seeing absolutely no reason to get involved here.

Implosion Continues

Fast-forwarding between January and today, shares have only lost ground as they now trade around $1.70 per share, with no immediate fix in sight.

In March, the company posted its 2021 results with revenues reported at $1.68 billion on which EBITDA was posted at $184 million. Adjusted earnings of $71 million, or $0.42 per share, were not bought by the market as the list and the number of adjustments made to the earnings numbers were extremely large. Net debt ballooned to $1.25 billion, a huge number in relation to this EBITDA number with leverage ratios of nearly 7 times being huge given the suboptimal profitability of the business, the high leverage, and the risks of rising interest rates. This remained the case, even if the company entered into some hedging ¨caps¨ to cancel out the risk of higher rates.

Following the deals announced late in 2021, Aveanna saw 2022 sales at around $1.9 billion on which EBITDA is seen between $190-$205 million, with a run rate of $220 million in the second half of the year.

In May, the company posted a mere 8% increase in first quarter sales, yet EBITDA fell 12% to $38 million, being a very clear warning sign, interpreted as such by the market. In July, the company warned that margin pressure would last into the second quarter with labor shortages and inflation making that EBITDA would likely be stuck between $36 and $39 million.

While inflation was seen in the cost base, it was not seen in the revenue base, with sales seen around $1.78 billion in 2022, a more than a hundred million cut from the initial guidance. EBITDA is now seen at a minimum of $150 million, as this guidance implies that the current run rate in terms of profits is seen in the second half of the year as well, with no recovery in sight.

Definitive second quarter results were announced in August, with sales up 2% to $443 million and EBITDA posted at $37 million. With net debt posted as high as $1.42 billion, leverage ratios approach 10 times here, clearly very unsustainable! The 185 million shares still represent a $300 million equity valuation, but this still seems like far an overvaluation given the debt load.

Avoid

For me, Aveanna remains a very easy avoid as the debt load is simply far too large, creating a mountain of worries with the substantial debt load, even if some caps are in place to limit the interest rate risk and expenses.

Even if the company makes it, appeal is far from a given as the entire business still trades at more than 11-12 times EBITDA here, and quite frankly, the EBITDA metrics have fallen only about 25% from the ¨normal¨ envisioned levels here. On the bright side, much of the debt is only due in 2028, or thereafter, creating quite some time to figure out the challenges, if this is possible, which quite frankly involves charging more for its services.

To me, the greatest point of agony is simply too high promises to start with from the IPO, and the very ill-timed capital allocation decision to pursue quite a few large deals in December, a time when the business was already seeing real turmoil.

While the situation is not entirely dismal yet, it is still very challenging, as quite frankly, I see no reason to get involved here given the poor track record of the management team since the IPO. At these low levels, it is too dangerous to bet against the company and shares now, but I see no green shoots to get involved here on the long side as well.