Why WellCare Health Plans Inc. Shares Look Sickly Today

Is this meaningful or just another movement?

Feb 12, 2014 at 2:52PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of WellCare Health Plans (NYSE:WCG) are trading nearly 10% lower this afternoon as investors react to the company's underwhelming earnings report, which included warnings of a significant impact expected from new Obamacare costs in 2014.

So what: WellCare's quarterly revenue rose 23% year over year to $2.44 billion, slightly ahead of Wall Street's $2.42 billion consensus. However, the company's adjusted fourth-quarter earnings of $1.09 per share missed the $1.15 forecast, and generally accepted accounting principles net income of $0.97 per share was weaker than the year-ago quarter's $1.11 in GAAP earnings per share.

Worse is the news that WellCare now expects anywhere from $1.17 to $1.26 per share in new costs as a result of new insurer fees mandated by the Affordable Care Act, which in the aggregate will cost the company between $125 million and $135 million in 2014. Other expenses will weigh down WellCare's bottom line by as much as $1.19 per share. In the final tally, the company's full-year EPS guidance was dropped to a range of $3.75 to $4.05, more than $1 beneath Wall Street's $5.08 estimate for 2014.

Now what: The upper edge of WellCare's new EPS guidance pegs its forward P/E at roughly 13.8 after the drop, which is about in line with the company's present valuation. That's cheap by most standards, but keep in mind that it also represents essentially no bottom-line growth for 2014. Without a dividend to tide patient investors over, it's hard to identify any good reason to stick around instead of hunting elsewhere for gains.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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