Breakout Stock Monday’s TSX breakouts: This healthcare stock is up 64% in 2023 with a further 61% gain forecast
On today’s TSX Breakouts report, there are 15 stocks on the positive breakouts list (stocks with positive price momentum), roughly half of which are gold stocks, and 41 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a healthcare stock that appeared on the positive breakouts list last week, WELL Health Technologies Corp. After the company reported record quarterly financial results last week, the share price rallied nearly 16 per cent on high volume.
During the height of the COVID pandemic, WELL’s share price rallied swiftly as the company’s telehealth services attracted investors. The share price rallied from sub $2 ($1.22 on March 18, 2020) to over $9 less than a year later ($9.23 on Feb. 22, 2021). However, in late 2021 and through 2022, the share price fell precipitously. In 2023, the share price has staged an impressive rebound, rising over 60 per cent year-to-date. Analysts believe this positive price momentum will continue. The average one-year target price implies a 61 per cent potential gain for the stock.
A brief outline on WELL is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Vancouver-based WELL Health Technologies is a hybrid healthcare provider with medical clinics as well as remote virtual care. WELL has three main business segments: 1) Canadian clinics with over 130 clinics across the country in B.C., Alberta, Ontario and Quebec; 2) U.S. patient services focused on providing products and services in the gastrointestinal therapeutics market at Ambulatory Surgery Centers and clinics across the United States; and 3) virtual services, which represented 34 per cent of total revenue in 2022. This segment includes revenue from its electronic medical records (EMR) business, a high-margin business that provides predictable, recurring revenue.
Interestingly, Hong Kong business mogul Li Ka-shing, one of the richest people in the world and sometimes referred to as the “Warren Buffett of Asia” owns shares of this small-cap Canadian stock according to WELL’s Nov. 2022 investor presentation.
Investment thesis
- Strong leadership. Chief executive officer Hamed Shahbazi founded TIO Networks Corp., a cloud-based bill payment processor that was acquired by PayPal Holdings Inc. in 2017 for over $300-million.
- Record results. In 2022, the company reported record revenue of $569-million, up 88 per cent year-over-year. WELL reported record adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $104.6-million, up 73 per cent year-over-year.
- Robust growth: Management remains focused on completing strategic acquisitions. For 2023, management is guiding to between 17 per cent and 20 per cent revenue growth, forecasting revenue to come in at between $665-million and $685-million. Management targets adjusted EBITDA growth of more than 10 per cent over its 2022 financial results. This guidance does not include any potential future acquisitions yet to be announced. As at Dec. 31, 2022, the company held $48.9-million of cash and cash equivalents on its balance sheet to fund its growth.
Quarterly earnings and outlook
Before the market opened on March 21, the company reported record results. Revenue came in at $156.5-million, up 35 per cent year-over-year and above the Street’s forecast of $146-million. Adjusted EBITDA was $27-million, up 6 per cent year-over-year and relatively in-line with the consensus estimate of $28-million. Earnings per share came in at 5 cents, a penny above the consensus estimate. Over the following three trading sessions, the share price rallied more than 15 per cent on high volume.
On the earnings call, chief executive officer Hamed Shahbazi highlighted potential growth drivers for the company, “Catalysts that we are watching closely as a team and believe active tailwinds for the company are as follows: 1) the increased likelihood of more public and private partnerships to support our health care ecosystem announced by political and public health leaders, most recently in Ontario; 2) a commitment by federal authorities in Canada to add significant additional funding to help Canada not only improve the sustainability of its health care ecosystem, but also digitize and modernize it; 3) the emergence of artificial intelligence, including generative AI to power tools and tech enablement for health care providers, never even conceived or thought before.”
The CEO expanded on the developing potential growth opportunity in Ontario, “On January 16, Premier Doug Ford and Health Minister Sylvia Jones announced the Ontario government’s new multipronged strategy to reduce wait times by partnering with independent service providers for Ontarians, including areas associated with MRI, CT, colonoscopy, endoscopy services. Ontario-based MyHealth Partners [MyHealth Partners Inc. was acquired by WELL in 2021] is the largest single license holder and service provider for specialty clinics providing diagnostics in the province of Ontario, and we believe is very well positioned to support Ontario government’s mandate, particularly in the areas of diagnostic imaging. We intend to apply for these new MRI and CT licenses, which will be provided by the province of Ontario. We anticipate the new licenses will be awarded in the second half of 2023. Although we won’t know for several months yet if MyHealth will be ultimately successful in its applications, we would likely incur additional capital cost to purchasing imaging equipment and for leasehold improvements. We anticipate lead times of several months to have these services fully operational in clinics, and as such, we expect minimal revenue generation in 2023. Any such meaningful revenue impact would occur in ‘24 and beyond.”
Dividend policy
The company does not pay its shareholders a dividend.
Analysts’ recommendations
This small-cap stock with a market capitalization of just over $1-billion is well covered by analysts on the Street.
After the company released its fourth-quarter financial results on March 21, 12 analysts issued research reports, of which 11 were buy recommendation and one analyst (Desjardins’ Jerome Dubreuil) issued a “hold” recommendation.
The firms providing recent research coverage on the company are: Beacon Securities, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Echelon Wealth Partners, Eight Capital, Haywood Securities, Laurentian Bank, Maxim Group LLC, Paradigm Capital, PI Financial, and TD Cowen Securities.
Revised recommendations
In March, four analysts have raised their targets.
- Canaccord’s Doug Taylor to $6.50 from $6.
- CIBC’s Scott Fletcher to $7 from $6.50.
- Laurentian Bank’s Nick Agostino to $8.50 from $8.
- Paradigm’s Daniel Rosenberg to $8.50 from $8.25.
Financial forecasts
The consensus revenue estimates are $673-million in 2023, up from $569-million reported in 2022, and $740-million in 2024. The Street anticipates EBITDA to come in at $116-million in 2023, up from $104.6-million reported in 2022, and $136-million in 2024. The Street is forecasting earnings per share of 24 cents in 2023 and 29 cents the following year.
Top line forecasts have increased while earnings forecasts have been relatively stable over the past few months. Four months ago, the Street was forecasting revenue of $653-million in 2023 and $713-million in 2024. EBITDA estimates were $120-million in 2023 and $138-million in 2024.
Valuation
The stock can be valued using a number of methodologies including a sum-of-the-parts (SOTP) methodology, ascribing different valuation metrics to the individual business segments, or on an enterprise value-to-EBITDA (EV/EBITDA) multiple basis.
According to Bloomberg, the stock is trading an EV/EBITDA multiple of 10.8 times the 2024 consensus estimate.
The average one-year target price is $7.50, suggesting the share price has over 60 per cent upside potential over the next year. Target prices vary widely. Individual target prices are: $5 (from Desjardins’ Jerome Dubreuil), $5.50, $6.50, two at $7, two at $7.50, $8, two at $8.50, $9, and $10 (from Eight Capital’s Christian Sgro).
Chart watch
Year-to-date, the share price is up 64 per cent, making it the fourth best performing stock out of 257 stocks in the S&P/TSX Small Cap Index.
In terms of key resistance and support levels, the stock has an initial ceiling of resistance around $5. After that, the next major resistance level is around $7. Looking at the downside, there is strong technical support around $4, which is right at the stock’s 50-day moving average.
ESG Risk Rating
According to Sustainalytics, WELL has an environmental, social and governance (ESG) risk rating of 22.4 as of Oct. 7, 2022. A rating of between 20 and 30 reflects “medium” risk.