AdaptHealth: Continued Divergence In Economic Performance, Reiterate Hold

Core Viewpoint - AdaptHealth Corp (NASDAQ: AHCO) continues to be rated as a hold due to low embedded expectations, low quality of returns, and valuations that do not support significant growth potential, with a current estimated value of $11-$12 per share [4][5][14]. Company Overview - AHCO specializes in healthcare-at-home solutions, focusing on home medical equipment and medical supplies, with a service network of approximately 670 locations across 47 states, servicing over 4 million patients annually [5]. - The company has significant potential in the sleep therapy market, particularly with its CPAP and BiPAP divisions, amidst an estimated 1 billion undiagnosed cases of obstructive sleep apnea globally [5]. Financial Performance - In Q2 FY'24, AHCO reported sales of $806 million, reflecting a year-over-year increase of 1.6% driven by a 6.5% growth in sleep therapy sales [6]. - Management projects FY'24 sales between $3.2 billion and $3.3 billion, with adjusted EBITDA of $700 million at the upper end of the range [6]. - Free cash flow for the quarter was approximately $117 million, exceeding expectations of $94 million, with a net leverage ratio of about 3x [6]. Market Challenges - The company faces headwinds from the introduction of GLP-1 weight loss drugs, which may impact the respiratory care market by potentially reducing the prevalence of obstructive sleep apnea [6][7]. - Diabetes sales were $151 million, with management noting a projected $10 million compression in pump supplies sales due to patients delaying new purchases [6]. Valuation Insights - AHCO is currently valued at approximately 1x EV/IC, which is considered fair given the company's low return on invested capital (ROIC) of less than 10% and lack of reinvestment into the business [8][9]. - The projected economic earnings for FY'24 are estimated at $20.23 million, with a per-share value of $0.15, indicating limited growth potential [11]. Future Outlook - The path to compound capital at high rates of return remains unclear, suggesting that incremental investments may not yield significant market value [10][14]. - The company is expected to maintain a steady state of operations with projected revenues of approximately $3.5 billion in FY'24, but growth rates are modest [16].