Over the past six months, Evolent Health’s stock price fell to $8.92. Shareholders have lost 5.6% of their capital, which is disappointing considering the S&P 500 has climbed by 15.7%. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Evolent Health, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Evolent Health Not Exciting?
Even with the cheaper entry price, we're swiping left on Evolent Health for now. Here are three reasons why EVH doesn't excite us and a stock we'd rather own.
1. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Evolent Health’s revenue to drop by 4%, a decrease from its 19.6% annualized growth for the past five years. This projection doesn't excite us and implies its products and services will see some demand headwinds.
2. Breakeven Free Cash Flow Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Evolent Health broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Evolent Health’s five-year average ROIC was negative 3.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
Final Judgment
Evolent Health isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 20.4× forward P/E (or $8.92 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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