AdaptHealth (AHCO)

Healthcare services provider AdaptHealth Corp. (NASDAQ:AHCO) beat Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 1.8% year on year to $777.9 million. On the other hand, the company’s full-year revenue guidance of $3.25 billion at the midpoint came in 0.5% below analysts’ estimates. Its GAAP loss of $0.05 per share was significantly below analysts’ consensus estimates.

Company Overview

With a network of approximately 680 locations serving patients across all 50 states, AdaptHealth (NASDAQ:AHCO) provides home medical equipment, supplies, and related services to patients with chronic conditions like sleep apnea, diabetes, and respiratory disorders.

The senior health, home care, and hospice care industries provide essential services to aging populations and patients with chronic or terminal conditions. These companies benefit from stable, recurring revenue driven by relationships with patients and families that can extend many months or even years. However, the labor-intensive nature of the business makes it vulnerable to rising labor costs and staffing shortages, while profitability is constrained by reimbursement rates from Medicare, Medicaid, and private insurers. Looking ahead, the industry is positioned for tailwinds from an aging population, increasing chronic disease prevalence, and a growing preference for personalized in-home care. Advancements in remote monitoring and telehealth are expected to enhance efficiency and care delivery. However, headwinds such as labor shortages, wage inflation, and regulatory uncertainty around reimbursement could pose challenges. Investments in digitization and technology-driven care will be critical for long-term success.

AdaptHealth competes with large national providers like Owens & Minor, Lincare Holdings, Rotech Healthcare, and Cardinal Health; regional providers such as DASCO Home Medical Equipment and Quipt Home Medical; and retail giants entering the healthcare space including CVS and Amazon.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $3.25 billion in revenue over the past 12 months, AdaptHealth has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, AdaptHealth’s sales grew at an incredible 40.1% compounded annual growth rate over the last five years. Its growth beat the average healthcare company and shows its offerings resonate with customers.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. AdaptHealth’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 3.9% over the last two years was well below its five-year trend.

This quarter, AdaptHealth’s revenue fell by 1.8% year on year to $777.9 million but beat Wall Street’s estimates by 1.7%.

Looking ahead, sell-side analysts expect revenue to grow 1.9% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

AdaptHealth was profitable over the last five years but held back by its large cost base. Its average operating margin of 1.2% was weak for a healthcare business.

On the plus side, AdaptHealth’s operating margin rose by 1.5 percentage points over the last five years, as its sales growth gave it operating leverage. The company’s two-year trajectory shows its performance was mostly driven by its recent improvements.

In Q1, AdaptHealth generated an operating profit margin of 3%, down 3.4 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

AdaptHealth’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

In Q1, AdaptHealth reported EPS at negative $0.05, down from negative $0.02 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects AdaptHealth’s full-year EPS of $0.57 to grow 79.6%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

AdaptHealth has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 4.2%, subpar for a healthcare business.

Taking a step back, we can see that AdaptHealth failed to improve its margin during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level.

AdaptHealth broke even from a free cash flow perspective in Q1. This result was good as its margin was 4.9 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

AdaptHealth historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.2%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, AdaptHealth’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

AdaptHealth reported $53.65 million of cash and $2.10 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $658.1 million of EBITDA over the last 12 months, we view AdaptHealth’s 3.1× net-debt-to-EBITDA ratio as safe. We also see its $65.8 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see AdaptHealth beat analysts’ revenue expectations this quarter. On the other hand, its EPS missed significantly and it lowered its full-year revenue guidance. Overall, this was a softer quarter, but the stock traded up 13.2% to $9.85 immediately following the results.

Updated: May 22, 2025 at 11:52 PM EDT

Before deciding whether to buy AdaptHealth or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

AdaptHealth isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s remarkable EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

AdaptHealth’s P/E ratio based on the next 12 months is 8.2x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $12.88 on the company (compared to the current share price of $8.94).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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