Concentra Group Holdings Parent, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Concentra Group Holdings Parent, Inc. operates a network of occupational health centers, offering a comprehensive suite of healthcare services to employers, with a growing focus on employer health and wellness programs.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Concentra, operating a vast network of occupational health centers across the United States, positions itself as a critical intermediary between employers, employees, and healthcare providers. Their services range from basic injury care to complex health assessments and wellness programs. At its core, Concentra makes money by providing comprehensive healthcare services, primarily to injured workers, and secondarily by helping companies create a healthier workforce, which will decrease injuries and costs.

Business Overview

  • Revenue Distribution: Concentra generates revenue through three main business segments: occupational health centers, on-site health clinics, and other (includes revenue from third party payers and insurance companies). The occupational health centers are the core of their business, providing immediate injury care and physicals as well as treatment to employees hurt on the job. They operate over 540 locations in the US. On-site health clinics are provided through a contracted service at the customer’s own business, and the “other” category consists of several other minor healthcare related revenue streams, such as on-site drug screening services.
  • Industry Trends: The occupational health and worker’s compensation industry is marked by several important trends. First is a focus on cost containment by the employers that is driving consolidation among payers and health providers. Secondly is the increased focus on technology to aid in health management, like telehealth. Lastly, the industry is also characterized by a changing regulatory landscape. The overall trend towards employers emphasizing the health of the employees to reduce both operational and health costs drives demand in the industry.
  • Competitive Landscape: The industry is fragmented with large players competing with smaller regional providers. Concentra’s main competitors are regional occupational health and workers compensation providers, large hospital systems, other on-site health service providers and telehealth providers. A competitive threat of any of the big payers such as UnitedHealth, Cigna, or Aetna forming a new service in house, or vertically integrating by buying some competitors also looms over the head of Concentra.
  • What Makes Concentra Different: Concentra is well differentiated by the geographic scale of their presence across the US, their integration of healthcare and wellness and by being one of the first movers to provide both the medical expertise and the infrastructure for compliance with regulations. It has also been a first mover for on site clinics which might make it the go-to provider for some clients.
  • Financial Performance: The company’s financials are complex because of all the different moving parts. Its revenue is up 12.6%, adjusted EBITDA was $318.4M which is 10.7% more than the 2021 equivalent, and net income was $133.5M vs. $117.5M last year. The revenue growth was mostly from organic growth, driven by visits, and a 2.5% increase in pricing. The company has been able to raise its operating margins to 10.5%. A large percentage of their revenue has always been from worker’s compensation, though their employer business has a higher growth potential and is expected to be higher by 2025. The company is also in the process of divesting its physical therapy clinics as a non-core component, which will allow it to put more emphasis on its main core competency of providing injury care. Net cash from operations grew from $207.4M to $220M YoY and the company reported $1.5 billion in cash and cash equivalents at year-end 2022. The management is looking to use these resources in higher growth areas, especially acquisitions.
  • Recent Concerns & Problems: The last several earning calls were focused on the negative impact of reduced volumes and a decline in Covid-19 related tests. The business also was facing labor issues with healthcare workers and a lack of healthcare workers were hurting margins. Also, the government mandated changes in tax liabilities in 2022. The company is hoping to reverse the impact of the increased tax with increased revenues and strategic operating improvements.

Most of Concentra’s value has been in providing direct care to injured workers, but in its strategic outlook, it is working towards higher-value services like health and wellness programs. These areas may bring in better margins and more predictable income compared to the more volatile direct-care services.

Moat Analysis: 2/5

Concentra has several differentiating factors, mainly revolving around their large geographic reach, their integration of services, and strong relationships with employers and insurance agencies. Despite that, they have little pricing power since they can be easily substituted, as there are many other competing occupational health providers.

  • Network Effects (Weak): Although Concentra’s large network provides convenience to national employers, it’s not a strong deterrent to competitors. It’s easier for big customers to start competing by leveraging their own locations.
  • Intangible Assets (Moderate): Concentra’s brand name in occupational health is valuable, but not insurmountable. It has many competitors, including local providers who are usually cheaper, and its overall brand lacks the recognition and pricing power of consumer-facing companies.
  • Switching Costs (Moderate): Once customers commit to Concentra it is costly and time-consuming to leave them, as it takes time to set up the system, and the client company may have to train their employees to switch providers, as healthcare provider setups are not usually plug-and-play. Also, some clients may have deep integrations with Concentra systems, making it even harder to leave. However, these switching costs are not nearly as high as other industries, like tech companies.
  • Cost Advantages (Weak): While Concentra benefits from economies of scale due to its size, there are many other players who can compete on price due to lower overhead or smaller market focus.
  • Overall Moat Rating: Combining the above factors, a 2 out of 5 is appropriate. A narrow moat, mainly through moderate switching costs and some intangible assets. However, the moat is easily eroded by competitors.

Risks to the Moat and Business Resilience

  • Regulatory Changes: The healthcare sector is constantly affected by regulations. Changes to worker’s compensation or healthcare laws could materially change the competitive landscape for Concentra, or the revenue and profitability for them, forcing them to change strategies or lose business.
  • Pricing Pressures: If new, highly financed players enter the field or if the payer base consolidates further, there will be pricing pressures that may hurt profits, because there is nothing in their product that allows them to charge extra for their services.
  • Increased Competition: Although the company is the largest player in the space, there are a lot of small regional competitors and other large nationwide competitors, so it’s hard for Concentra to gain market share and protect their moat. Also, any competitor that can develop an innovative technology, like telemedicine, may compete effectively against them.
  • Economic Slowdown: A major economic slowdown can lead to lower employer investments in healthcare, impacting the volume of services used.
  • Technological Disruption: There are always threats from companies with better tech, or companies who can do services more cheaply and efficiently, for example, by using a remote-first strategy. The fact that other companies can imitate the business model easily, or start using an AI/chatbot platform to improve their business may further hurt Concentra’s moats.
  • Decreasing Growth: If their growth slows, Concentra may have problems with operational deleveraging and debt repayment which will in turn affect their business performance.

There is also a high dependency of their income on the workers compensation space which can be volatile with the economy. Though they are focusing more and more on predictable revenue with employer health and wellness programs, there is a risk they can lose some business in that space with competitors with better programs or lower cost.

Understandability: 2/5

Concentra’s business is relatively easy to understand at the core: providing occupational health services to employers. However, their business also has several layers to it that make their operations and finances complicated. With the addition of on-site clinics, telemedicine and other peripheral services, the business model is not readily understandable to the average investor. Additionally, the mix of different payer sources including workers’ compensation and commercial insurance further complicates the financials. The lack of readily-available financial information in a clear format also does not help. They could improve in communicating their business. Thus, a 2/5 rating is warranted.

Balance Sheet Health: 4/5

Concentra’s balance sheet appears solid overall, with a healthy level of cash, a low debt profile, and a good amount of equity. While the company does not always have a very consistent history of profits, their free cash flow generation appears consistent.

They have a large amount of cash available to deploy, and are actively exploring different acquisition strategies. But they need to be mindful of their debt, as this will add to the cost of capital and hurt the returns. They have a strong credit profile which gives them access to low debt, but they should not use a lot of debt for acquisitions. Overall a 4/5 is appropriate for them.