P3 Health Stock Could Be A Good Play Eventually (NASDAQ:PIII)

The Investment Thesis

P3 Health Partners Inc (NASDAQ:PIII) is a small patient-centered company based in Henderson, Nevada. Being focused on the patient they offer superb care services compared to many other companies in the country. Much of the owned facilities are clinics and wellness centers. With such a niche product and offering they tend to attract people with a little bit more money to spend when it comes to healthcare.

P3 Health Partners has seen a good increase in revenues and the future seems bright. But until the company has a positive bottom line, I will maintain a hold on the company.

Last Earnings Report Highlights

In the latest earnings report, P3 Health provided investors with another strong quarter of growth. The top line saw a 59% increase YoY on the back of Medicare Advantage members exceeding 100 000. With revenues at $248 million, there is clear momentum right now with the company.

But with a higher top-line growth, unfortunately, the bottom line has seen a decrease instead. The company had a net loss of $65 million in the last quarter, compared to $32 million a year before.

Looking ahead the management maintains optimistic outlooks and sees revenues coming at over $1 billion which would represent a YoY increase of around 69%. Some comments were made on the member total as well and they maintain an outlook that they will continue keeping over 100 000 total members by the year’s end.

The CEO Sherif Abdou continued the trend of optimism for their outlook and said the following “This growth demonstrates the power of our healthcare model, as we enable the payors, patients, and providers to collaborate on the singular mission of better patient outcomes”.

Sector Outlook

As P3 is a part of the healthcare services industry there will more or less always be demand for their product. People will always need health care and the specific services that come with it. Because of this, the industry is expected to grow around 8.4% each year from 2022 until 2026, topping out at $10 414 billion.

The market is massive and there are plenty of opportunities for companies willing to make a push and invest in their business to gain market share. What I think will be very important for companies in this sector is keeping manageable operating costs. All in order to maintain good margins and keep investors interested. Volatile prices can always occur, but if companies can hedge against it better then that will make them more valuable in investors’ eyes.

Competitors

In the space that P3 Health is in there are a number of competitors to fight off. Some notable I have seen are UpHealth (UPH) and Better Therapeutics (BTTX). These are companies also focusing on providing a patience satisfying experience. What might be the competition here in my opinion for P3 Health Partners is that these companies would try and move into areas where P3 is operating.

But I think that given the impressive growth the P3 has seen recently, they are better set up to capitalize on the momentum and establish more clinics and gain a larger customer base.

None of these companies are near being profitable yet, but I think that P3 is the one going to be first. That only made me much more prone to go with that company instead of what I would describe as wishful thinking with the others.

The Balance Sheet

Moving over to the balance sheet for the company there are some worrying things I have noticed. Firstly, the cash position that the company holds has seen an almost 75% decrease, going from $140 million to $34 million. I think this is a big negative as in the face of a more challenging economic environment to maneuver in, a big cash position is a great cushion to have for a company. Thankfully P3 Health doesn’t have any current debt that they need to pay off. Instead, they have long-term debts of $80 million. I think that if the company can come back to previous levels of positive cash flows, then this amount of debt is nothing to worry about.

In terms of assets, they have fallen just like the cash position has too. But this is because of a goodwill impairment the company made in 2022, where almost $900 million were cut off. This means that the current ratio between assets and liabilities is 3.93 right now.

With the book value, the company as they are trading at a slight discount right now. Book value per share of $1.88 to the share price of $1.7.

Shares have been quite heavily decreasing over the last few years, which is a great bonus if you were to be interested in investing in the company. However, I wouldn’t be surprised if this slows down as more focus is placed on building a cash position and expanding the business to more areas.

Valuing The Company

P3 Health is growing at a good pace and it seems that the management knows what they are doing and keeps an optimistic outlook for the company. I think that they will be able to eventually become profitable and take more and more market share.

A p/e of 12 I think is a reasonable multiple as the company is new and up and coming and yet to prove itself on the big stage. Until they maintain good free cash flow and polish up their balance sheet even more I will keep this multiple.

Despite that, according to my calculations, an entry at the current prices would provide a very good return until 2027. But that is if the company manages to grow at the pace I hope and increase the net margin to a similar level to the sector.

What I think will be important to look at is the amount of shares being diluted. As the company tries to expand they also need to raise capital, and I don’t think free cash flow will be enough. Right now I think that investing in the company is a bit too risky as they don’t really have a positive bottom line so the fundamentals are yet to be there. But I think the future is bright for them, and in the case of someone having shares in the company, holding on to them is my recommendation.

Conclusion

P3 Health Partners is a growing company that has a good outlook with several facilities expected to be opening up before 2024. Right now, the revenues are expected to grow almost 69% YoY if the outlooks for 2022 come in according to estimates by the management.

This gives me hope there is competent leadership in the company right now. The cash position saw a big dip which could worry investors about debt becoming an issue. But I think the positive cash flows the company has achieved will help offset this worry.

For the time being though, I think a hold for shares in the company is the way to go. Until there is a positive and steady bottom line, I wouldn’t invest money just yet. It’s a small company and will mostly fly under the radar for bigger investment firms, so I don’t think there is a rush in starting a position in the company.