AdaptHealth's (AHCO) increased spending on labor that weighed on its Q1 results ensured the "smooth" rollout of a major capitated contract in the home medical equipment space, RBC Capital Markets said in a note Friday.

AdaptHealth is now well positioned to extend the relationship beyond the initial five-year period, while the new contract serves as a proof of concept that could attract additional large-scale capitated partners, the investment firm said.

Management said the $12 million labor headwind includes $8 million variable labor cost to boost the capitated go-live process and $4 million of temporarily high wages and benefits from "duplicative regional onboarding," the note said.

The $8 million variable labor cost is likely to normalize by the end of Q2, while the $4 million will likely decrease as the operating model right-sizes, RBC said.

RBC kept AdaptHealth's outperform rating and increased the price target to $15 from $13.

Shares of AdaptHealth were up 0.7% in Monday trading.

Price: 11.38, Change: +0.07, Percent Change: +0.66