Foolish Forecast: Healthways Looking Ill

Managed-care provider Healthways (Nasdaq: HWAY) will report its fiscal second-quarter 2008 financial results tomorrow. Let's give it a checkup from the neck up.

What analysts say:

• Buy, sell, or waffle? A sweet 16 analysts have put a cold stethoscope to the Motley Fool Stock Advisor recommendation. Ten of them say to hold your shares, while five find the company in the pink of health at current prices and rate it a buy. Only one says Healthways is ready to give up the ghost and has rated it a sell.
• Revenue. Sales forecasts for the year have been scaled back, after Healthways warned last month that two contracts it had been including in guidance were being reduced or canceled. Revenue is expected to rise 14% to $182.6 million, but that's because it includes revenue from its Axia acquisition.
• Earnings. Profit forecasts have also been pared down and now are anticipated to run at $0.33 a share, up from the $0.30 it posted a year ago but down from the $0.39 analysts had anticipated at the end of last quarter.

What management says:
Management delivered a shock to the system when it said earnings would be a lot worse than anticipated because two big health plans decided not to give Healthways the business it had previously counted on. Is disease management -- Healthways' specialty -- losing favor? The government, at least, seems to have had a change of heart. Medicare's pilot program to contain health costs through interventions will be taken off life support this year, because it didn't live up to expectations. The unfavorable diagnoses have sent Healthways' stock into a tailspin; it's now lost more than half of its value since its January peak.

What management does:
To say Healthways' program of disease management is incurable is to say too much. The company has years of success that seem to prove the validity of its methods. Although Medicare is pulling out and two contracts weren't signed, health-care provider Cigna (NYSE: CI) just renewed a contract with Healthways through 2013, and international expansion still represents an opportunity, since the company has been in the overseas market only since August.

What CAPS Fools Say:
Here's how Healthways stacks up against some of its peers and competitors on Motley Fool CAPS:

One Fool says:
A few times over the past year, I've seen Healthways represent a value to the price it was trading at. But there were also too many times when investors couldn't place enough confidence in the guidance management had provided. Last year, for example, the company was still including potential profits from the Medicare pilot program despite an unfavorable prognosis.

The market has stripped down Healthways to little more than its hospital gown. The pilot program is gone, guidance is based on known contracts and factors, and it's trading at levels unseen in three years. However, its price does still carry a top valuation based on trailing earnings, and even on a forward basis the market rates it at about twice the level of most of its rivals. Yet it's always carried a rich valuation, and its current level is about half of what it has traditionally been. That reality indicates that the selloff may have been overdone. The opportunity to pick up shares at a discount may be just what the doctor ordered.

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