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Investing.com -- Shares of agilon health Inc (NYSE:AGL) soared 37.3% following an upgrade to Outperform from Market-Perform by Bernstein, reflecting increased confidence in the company's turnaround plan and a recovery in the Medicare Advantage (MA) industry. The price target was also raised to $8.50 from $3.30, indicating a significant upside potential.
The bullish sentiment comes after Bernstein analyst Amir Farahani cited several positive developments that bolstered belief in the company's strategic initiatives. "We have received several data points that increase our confidence in the turnaround plan, thus lowering risk of a capital rise. In recognition of our higher conviction, combined with the impact of recovery in the MA industry, we lower the cost of equity in our DCF model, which results in PT increasing to $8.50," Farahani stated.
Agilon's stock movement reflects the market's response to the company's progress in executing its multi-pronged turnaround plan, including the termination of unprofitable partnerships and successful negotiations to reduce exposure in carve-outs. These initiatives have led to improved medical cost metrics and a more disciplined approach to growth, with a projected enrollment compound annual growth rate (CAGR) of 41% since 2021. The '25 cohort is expected to have 20,000 members, significantly smaller than in previous years, and on a glide path to full risk.
Additionally, industry trends are also playing a role in agilon's favor. Farahani expects a recovery in MA margins and stabilization of utilization trends in the sector, which could help the company navigate through the transitional phase into 2025 with a lower risk of needing additional capital. By 2026, the analyst anticipates agilon to be on stronger footing, potentially aligning its stock valuation more closely with peers.
Currently, agilon trades at 0.22x next twelve months (NTM) sales, compared to peers in the 0.6 to 0.9x range. The discount in valuation has been attributed to agilon's cash flow profile, as peers are at or near breakeven. As the company approaches cash flow breakeven, Farahani believes the stock will gradually catch up with peers in valuation.
The upgrade and raised price target reflect a significant shift in analyst sentiment towards agilon health, suggesting a more optimistic outlook for the company's financial performance and stock price trajectory. Investors are responding to the positive developments and the anticipation of continued improvement in the company's operations and industry conditions.
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