Cano Health Inc (NYSE: CANO) stock has tumbled after reports suggested that a possible sale to CVS Health (NYSE: CVS) may have broken down. The company has long been urged by powerful investors to seek a sale, with the apparent stalling of discussions leading its share price to dive by more than 40% on Monday.
Despite this, is CANO stock a good investment?
What is Cano Health Inc?
Cano Health provides primary care medical services to its members in the United States and Puerto Rico.
The company owns and operates medical centers enabled by CanoPanorama, a proprietary population health management technology-powered platform that provides the healthcare providers at its medical centers with a 360-degree view of their members with actionable insights to improve care decisions and member engagement.
The company also operates pharmacies, as well as provides dental services in its medical centers.
As of June 30, 2022, it operated 143 owned medical centers and maintained affiliate relationship with approximately 1000 physicians.
Cano Health was founded in 2009 and is headquartered in Miami, Florida.
CANO Stock Financials
The company’s most recent financial results, which cover the three-month period ended 30 June 2022, show it achieved total revenue of $689.4m during the period, which constitutes year-on-year growth of 101%.
The impact of this massive revenue growth has been somewhat mitigated by a similar explosion in total operating costs, which have climbed from $398.1m to $720.4m across the same period.
Even so, net losses have been slashed from $38.3m to $14.6m. Meanwhile the business had cash, cash equivalents and restricted cash of $47.8m at the end of the period.
Additionally, these most recent results saw Cano Health hike its full year guidance. The business now expects to achieve membership in the range of 300,000 to 305,000, up from prior guidance range of 290,000 to 295,000, while the business now has a minimum expectation of $2.85bn for total revenue compared to prior guidance of $2.80bn.
However, costs are also expected to be higher, with medical cost ratios of 78%-79% anticipated due to a higher number of new members.
The stock has a price to sales ratio of 2.25 and a price to book value of 5.03. These compare with respective averages of 0.2 and 0.99 for the healthcare sector, according to CSIMarket, indicating that the stock may be overpriced.
Across the year to date, CANO stock has dropped in price by just over 49% to its price at the time of writing of $4.73. The last 12 months have seen the share price fall by 57%, with a 52-week high of $12.87 and a low of $3.81.
The company does not distribute a dividend to shareholders.
CANO for Sale
CANO stock has seen significant volatility since the business went public in June 2021, leading some of its backers to call for a sale.
In August, CANO stock received a bump after key investors Owl Creek Asset Management urged the board to pursue a sale to a strategic buyer.
The letter stated:
“While we believe in the company's business model and management's ability to execute the post ‘de-SPAC’ business plan, the past year's roller coaster of accounting issues has shaken our confidence. We feel that Cano's continued growth will require a larger and stronger vertically integrated partner with access to the capital needed to execute the company's business plan.”
The firm argued that the move was best for the business and shareholders alike, pointing out that buyers had paid a “meaningful premium” in other transactions relating to similar companies.
Owl Creek is not the first investor to take this stance, with Third Point LLC calling for the company to pursue a sale back in March 2022, similarly citing investors’ lack of confidence in SPAC-originated business’ as a factor.
CANO Investment Risks
Of course, the primary risk with investing in CANO stock with the expectation of a quick sale is that this may never materialise. CVS walking away this week has proven that mergers and acquisitions really are not a walk in the park.
Aside from this, it’s worth examining whether the business can stand on its own two feet.
From this, a further risk is clear. The business is currently loss-making and cash reserves look nowhere near as healthy as they did just last year. The company is owed a significant sum of money through accounts receivable, but there still appears to be some chance the business could have to seek further funding.
However, net losses are on the way down, so the business could avoid this issue.
Beyond this, the business faces the same industry-wide risks that its peers have to deal with, including political and regulatory changes which might impact the way in which it makes money.
The vast majority of the business’ centers are in Florida, leaving it particularly exposed to any legislative or regulatory changes in the state.
Is CANO Stock a Good Investment
Cano Health is a business achieving very impressive growth and it looks to be forging a way towards profitability.
That being said, the major volatility of CANO stock since it went public last summer will send many investors’ risk alarms blaring. Influential backers are pushing the company towards a sale that may not come off.
The saga is unlikely to be over despite CVS Health’s apparent withdrawal from a deal, so CANO stock could see its price bouncing around for some time yet.
However, this could of course pay off for investors, with Owl Creek suggesting in its previously mention letter to Cano Health directors that a sale could come at as high a price as $14 per share.
To formulate this figure, Owl Creek used the example of Amazon’s (NASDAQ: AMZN) recent purchase of One Medical, noting that the tech giant had paid three times the seller’s expected annual revenue.
Such a sale remains very uncertain however, so investors should consider their appetite for risk before backing CANO.
The nine analysts offering ratings on the stock in the Wall Street Journal have a consensus Overweight rating on CANO, with an average price target of $9.11 compared with its current price of $4.73.