Investment overview

Our buying talk on CareMax, Inc. (NASDAQ:CMAX) was not profitable which is why we are here today to return the position to neutral. Unfortunately, despite the growth rates shown in the last quarter, the market has reacted poorly and was probably looking for more of the name. While management has updated the guidelines, recent developments in the company’s growth engine have not resulted in an increase in the share price. This poses a risk to keep CMAX over the line, especially with so many other selective opportunities available.

You can see below that the stock has lost support and broken long-term resistance levels in the chart below.

Appendix 1. CMAX 2 Year Weekly Price Action

As a reminder, our buying position on CMAX is based on the factors below [you can read it by clicking here]:

1. In July 2021, MAX announced that it had signed a definitive agreement to acquire Steward Health Care System’s Medicare value-based care business (“MVBC”). MAX is now the only values-based MSO for the division. The transaction was made on a consideration of $25mm in cash/partial cash and an additional 23.5mm of Class A MAX shares. The implied valuation on these metrics was about $135mm, or about 8x EV/FY23 EBITDA.
2. The efficiency with which PCM had been able to convert the costs associated with the opening of new centers into contribution margins was remarkable. We noted that primary care center growth appeared to have a positive effect on PCM’s overall financial performance. The company had demonstrated its ability to open new centers efficiently [see: previous analysis, Exhibit 2], which in turn has resulted in double-digit PCM sales increases. This trend added to the predictability of the company’s future cash flows at the time, which we believe helped to increase its overall value.

After reading the above and comparing it to the latest investment developments, it will be clear why we changed our position to hold.

Latest investment highlights

On the latest developments, CMAX had a strong third quarter, with total revenue of $158 million, growing 51% year over year on adjusted EBITDA of $9.2 million [it reported in early November, like most peers]. This growth was driven by a 60% increase in Medicare at-risk revenue, and CMAX ended the quarter with 39,500 Medicare Advantage members, a 49% increase over the prior year.

Figure 2. Sequential sales growth peaked.

CMAX is targeting a range of $2mm to $3mm for CapEx per clinic for their de novo strategy. The company has been able to secure tenant financing and landlord type financing for the build-outs, which will see the bulk of the costs incorporated into their rental costs once the clinics are open. So there is more room for positive sides there. To that end, CMAX opened three more de novo centers in the fourth quarter, bringing the total number of centers to 54 and they expect to have 60 centers by the end of the year.

The acquisition of Steward’s value-based healthcare business Medicare would be the key highlight in our view. We note that CMAX has drawn $45mm of the deferred drawing term facility to fund the acquisition. It also expects to take on additional outside funding for Steward’s 2022 Medicare shared savings claim. Management says it hosted “numerous town halls with Steward doctorstraining them and providing resources to support the deployment of value-based care.

We believe that the Steward acquisition will enable it to generate a more selective return on investment capital. We also note that CMAX’s core centers still have capacity to grow their membership by more than 50%, not to mention that overall Medicare Advantage penetration in Central Florida is still below 60% compared to more than 70% in South Florida. You can see the growth in these segments below.

Exhibit 3. Medicare Advantage Penetration

Based on its growth trajectory to date, CMAX is raising its full year sales expectation from $580mm to $600mm to a new range from $600mm to $620mm. It based these assumptions on growth in core organic sales, de novo expansion and MSO growth.

Figure 4. Revenue forecast for CMAX.

• Please note that the updated guidance could be a tailwind for the business leading into the end of H2 FY22.
• However, if it misses this guideline, it could turn out to be a downside risk.

Rating and conclusion

Looking ahead, consensus has valued the stock at $0.8x forward EV/sales. We think the stock has a good growth rate and could reach the top end of its target range. Apply a 1x forward EV/sales multiple [still the sector median] based on CMAX’s FY22 revenue estimates, a price target of $5.60 is derived. At the lower end, it’s $5.40. The discrepancy with the current market price, every price target wonders whether CMAX is undervalued or not.

We’re not that confident. A rally towards these targets would explain a small mean reversion, but it doesn’t necessarily mean that value in the stock is being overlooked. It might even suggest that it’s just undervalued in our opinion. Even so, it’s still a talking point not to ignore the stock completely. Therefore, the balance of downsides and valuation discussed in this analysis supports our hold thesis about rating the stock as an outright sell.