On Tuesday, Truist Securities revised its stance on R1 RCM Inc (NASDAQ:RCM), downgrading the stock from "Buy" to "Hold" and adjusting the price target of the shares to $16.00.
This change follows a significant share price increase of approximately 26% since February 26, 2024, when New Mountain Capital made a public offer to acquire the company at $13.75 per share. In contrast, the S&P 500 saw an increase of around 1% during the same period.
The revision comes after R1 RCM reported fourth-quarter earnings for 2023, which surpassed expectations, but the company's outlook for 2024 did not meet consensus predictions. Truist Securities has updated its estimates for R1 RCM for the years 2024 and 2025 and continues to apply an 11x multiple to its 2025 adjusted EBITDA estimate. This approach results in a fundamental price target of $15, a slight decrease from the previous target of $16.
From a leveraged buyout (LBO) perspective, the firm's analysis suggests that a private equity entity could potentially offer close to $17 per share to achieve a reasonable internal rate of return (IRR) and multiple on invested capital (MOIC). However, the absence of clear strategic buyers for R1 RCM is noted, and while the offer from New Mountain Capital at $13.75 per share is considered low, there is a belief that R1's Board and management might accept an offer if it approaches $17.
The probability of a deal occurring is estimated at 50%, leading to the probability-weighted price target of $16. This target suggests a potential upside of around 7% from the current share price. Given this limited upside potential, Truist Securities has decided to adopt a more neutral position on the stock.
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