CareRx is a double, says Desjardins

Look for slightly better than consensus revenue in the upcoming third quarter results from Canadian pharmacy services company CareRx (CareRx Stock Quote, Charts, News, Analysts, Financials TSX:CRRX). That’s according to Desjardins Capital Markets analyst Gary Ho, who delivered an update to clients on Monday. Ho maintained a “Buy” rating on CRRX while dropping his target price from $6.00 to $5.50 per share for a projected one-year return at the time of publication of 103 per cent.

Ho reported on the Diversified Industries sector in a third quarter earnings update, saying labour shortages continue to impact much of the economy in Canada and the US, with a growing consensus that the problem could drag on for “more than a few quarters.” At the same time, Ho reflected that macro events such as the COVID pandemic, supply chain disruptions and geopolitical uncertainties appear to have reversed the globalization trend of last few decades, with deglobalization and friendshoring now swinging the pendulum the other way. 

As for CareRx and its Q3, tentatively scheduled for November 9 before the market open, Ho said he would be focusing on margin expectation and organic wins to help offset the recent loss of its contract with Extendicare.

CareRx, which has a network of pharmacy fulfillment centres and serves over 97,000 residents in over 1,600 senior-care communities such as long-term care facilities, retirement homes and assisted living facilities, should hit third quarter revenue of $94.5 million, according to Ho, with the consensus listed at $93.7 million. The analyst is calling for EBITDA of $7.6 million compared to the Street’s call at $7.7 million. EPS is expected to register at negative $0.65 per share.

“Our target price declines to $5.50 (from $6.00) based on a multiple of 9.5x (was 10.0x) on a lower 2023 EBITDA estimate, offset by a lower share count. CRRX is trading at 5.8x our 2023 EBITDA estimate, below its five-year range of 6.7–10.7x,” Ho wrote.

Ho said CRRX has reported a continued recovery in long-term care occupancy rates and that bump should drive organic growth at the company’s existing locations. At the same time, Ho thinks margins are likely to soften for the company as healthcare labour challenges persist and extra costs for recruiting and training are factored in.

“Our model reflects a margin decline starting in 3Q22 given the Extendicare offboarding, followed by a gradual ramp toward about ten per cent by the end of 2023,” Ho said.