Investing is certainly a "she loves me . she loves me not" sort of endeavor at times. A nickel here or there on guidance, and what was once a darling can be summarily sent to the dumpster by disappointed or nervous investors. Such seems to be the case for Motley Fool Stock Advisor recommendation Coventry Health Care (NYSE: CVH) today, as investors sell off the shares of this managed health company in response to below-average guidance.
Like other health management companies, including Stock Advisor pick UnitedHealth (NYSE: UNH), Humana (NYSE: HUM), and WellPoint (NYSE: WLP), Coventry shares had been doing quite well as the company leveraged strong pricing and well-contained medical costs to the boon of net profits. And that was still generally the story in the third quarter. Revenue rose almost 26%, margins expanded, and reported net income grew almost 53%.
Guidance for the next year, though, was not quite as rosy. Management pegged a range of $3.54 to $3.59 before the impact of Medicare Part D and options expensing, and that was below the prior average of $3.64. That's not bad year-on-year growth, but coming in below analyst expectation could fuel the worries that the really good times in managed health care are nearing an end.
Again, Coventry seems to be doing fine for now. Medical costs were only up 9% in the quarter, and the company saw a good overall improvement in the medical loss ratio. While Medicare and Medicaid loss ratios worsened from last year, the commercial loss ratio improved by 200 basis points and the overall ratio improved by 80 basis points. And while membership growth has been modest (2% in fully insured, 2.5% overall), commercial yield growth was over 8% in the quarter.
I think that eventually there has to be some slowdown in these companies' ability to raise rates. We've all heard of the difficulties that small businesses are having with health-care insurance costs, and there's only so much money that they (and their workers) can afford to spend. But that doesn't mean the companies can't continue to fight rising health-care costs and/or make ongoing improvements in their operational profitability. In other words, I don't think the end is exactly nigh.
Coventry is on my list of kick-me stocks -- that is, stocks that I took a good, hard look at, didn't buy, and then kicked myself for failing to do so. If today's negative reaction continues, I may get a second chance to buy shares within my circle of comfort. In the meantime, I'll try to wait patiently.
For more healthy Foolishness:
The Motley Fool has kicked off its ninth annual Foolanthropy campaign! Nominate your favorite charities on our
Foolanthropy discussion board
through Nov. 1. For guidelines on what makes a charity Foolish, visit
www.foolanthropy.com
.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
Terms & Conditions
RSS Headlines
Fool UK