Thinking of Buying OSH's Dip? Consider This First.

Standing out among the Street's worst performers today is Oak Street Health, a medical care facility company whose shares slumped -13.4% to a price of $19.39, 43.75% below its average analyst target price of $34.47. The average analyst rating for the stock is buy. OSH lagged the S&P 500 index by -12.6% so far today and by -23.6% over the last year, returning -39.5%.

Oak Street Health, Inc., together with its subsidiaries, offers healthcare services to the patients in the United States. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.

Oak Street Health does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-1.66 and $-1.98. We can see that OSH has a forward P/E ratio of -11.7 and a trailing P/E ratio of -9.8.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US healthcare companies is 13.21, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Oak Street Health market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.

Dividing Oak Street Health's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -0.35. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.

To understand the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, Oak Street Health's operating margins have averaged -23.0% and displayed a mean growth rate of -9.6%. These numbers show that the company may not be on the best track.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Oak Street Health's free cash flow, which was $-278,500,000.00 as of its most recent annual report.

Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In OSH's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $-140,302,750.00 and they've been growing at an average rate of -61.3%.

Oak Street Health is likely overvalued at today's prices because it has a negative P/E ratio, no published P/B ratio, and an irregular stream of negative cash flows with a downwards trend. The stock has poor growth indicators because of its consistently negative operating margins, and a negative PEG ratio. We hope this preliminary analysis will encourage you to do your own research into OSH's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

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The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.