Boring Portfolio

Boring Selling OXHP
October 28, 1997

**This trade is being made under the regular portfolio policy, namely, once The Fool announces an intention to trade, that trade will be made within the next WEEK, as opposed to the next day. For more detail, please read the "New Trades" section of the Hall of Portfolios.**

Selling 100 Shares of Oxford Health Plans

800 Connecticut Ave.
Norwalk, CT 06856
(203) 851-2308

(Oct. 28, 1997) -- On Monday morning, Oct. 27, 1997, Oxford Health Plans stunned industry analysts and shareholders alike by announcing that the company's performance would fall far short of expectations for the balance of 1997 and for 1998.

On a day when most stocks were hit hard, OXHP's value was obliterated: nearly two-thirds of the company's market capitalization evaporated in a matter of hours, as OXHP plummeted $42 15/16 to $25 13/16. The stock easily topped the Nasdaq's most-actives list, trading an incredible 49 million shares -- over 62% of the outstanding stock.

In its press release, Oxford said it expected to report a charge to net earnings of $47-$53 million in the third quarter to beef up reserves for medical claims. In addition, the company warned that revenues would be below expectations due to delays in billings. As a result, Oxford expects to show a loss of $0.83 to $0.88 per share for the quarter. The Street had been expecting a profit of around $0.47 per share, according to numbers supplied by First Call.

"These adjustments recently came to the company's attention as a result of reviewing and reconciling previously delayed premium bills and medical claims," said Wiggins in the press release.

Oxford also said it was increasing its estimates of future Medicare expenses and other administrative expenditures. These factors are expected to lower fourth quarter earnings to $0.25 to $0.27 per share, excluding a one-time gain expected from the sale of Health Partners Inc. Analysts' consensus forecast had been $0.50.

Finally, and most significantly, Oxford said that increased costs "will impact earnings estimates for 1998 by $0.60 to $0.80 per share." Since the old consensus estimate was for EPS of $2.47, this implies a revised 1998 figure of $1.67 to $1.87.

As stated in my recap of Boring Portfolio activity on Monday evening, my first reaction to the news was to wonder whether (my own and the Street's) confidence in management had been so undermined by this bombshell that the Borefolio should simply wash its hands of the stock and move on. The other question I had was whether the sell-off had been overdone, in which case it might be prudent to hang on for at least a while to see if the stock would recover.

Taking the latter question first, I suggested that if you take $1.75 as a point estimate and assign a market multiple to it, you're at maybe $36 as a near-term target for OXHP. On the other hand, if you believe, as some apparently do now, that Oxford merits no more than an "insurance company" multiple, you're at around 14 x $1.75 = $24.50. All of this reckoning, of course, assumes that Oxford's revised estimates are credible, and that is entirely open to question.

Faced with a high degree of uncertainty, I decided provisionally to wait until Oxford reported its third-quarter results in a week, to see what answers that report or the follow-up conference call might provide.

As it turns out, Oxford offered some additional clarification in a conference call with analysts and in interviews with reporters late yesterday. Comments from analysts in stories released on the wires last night and appearing in newspapers this morning serve merely to reinforce what Oxford revealed in its press release ...

... which is basically that the company did not know with any real degree of accuracy what its membership growth, revenues, or outstanding claims were and that the problem goes back a full year. From Oxford's press release:

"We overestimated how much of our customer accounts receivable were collectable, and the catch up of claims payments revealed payment obligations that exceeded our original estimates. Much of the charge relates to expenses incurred in prior periods.

"Delays in generating premium bills from September 1996 to June 1997 adversely affected the Company's ability to ultimately collect premiums due. Billings became current during the third quarter and the Company began intensive efforts to reconcile and collect accounts receivable. As a result of information recently gained from that process, Oxford reduced its membership estimates for the third quarter to account for these retroactive changes."

Yet throughout this entire period, Oxford's management repeatedly assured analysts and shareholders that growth was strong, medical costs were steady or even declining, and claims and billings glitches were resolved.

As it now turns out, Oxford was particularly hurt by its delay in getting bills out to customers who hadn't utilized the company's services during the time the bills were late. Many decided to cancel their coverage for the period rather than pay the bill, Oxford chairman Stephen Wiggins said, according to a Reuters story. Medical claims also were greater than expected among other customers, according to Wiggins.

Reuters quotes Wiggins as saying, "We've been building this company for 15 years and this is our first hiccup."

Some shareholders may well take offense at Wiggin's reference to this apparently significant managerial oversight and its resultant financial damage as a "hiccup."

Indeed, some shareholders already have. A class-action lawsuit was filed today against the company and its officers, alleging that Oxford withheld and misrepresented information "in a manner which concealed the adverse impact of a computer crisis which arose from changes made in the company's computer system in September 1996." The suit goes on to allege that company officials disposed of "substantial quantities" of Oxford stock while its price was artificially inflated by false and misleading statements.

Such suits can drag on for years, and Oxford management may decide that they cannot elaborate further upon the company's problems while legal proceedings are underway.

In any event, many industry analysts have made it clear that Oxford has severely its credibility with the Street. "I don't know exactly what happened," said Greg Crawford, an analyst at Fox-Pitt Kelton in New York, to Reuters. "Up until a few weeks ago, they were saying they were fine. I don't know how issues turn up from third quarter last year all of a sudden."

Still, some analysts believe that Oxford can recover from here. "This is not a broken company," said Robertson Stephens analyst Thomas Hodapp to Reuters. "This is still the franchise in the New York market. So I think it's going to have some takeover appeal ... We will see this over the next 12 to 18 months return to something like a 25 to 30 multiple."

Perhaps so. Some value investors drool at the opportunity to pick up shares of companies that everyone hates, and they may well make a decent gain with Oxford at current prices. But I don't know when if ever I'll be able to take at face value what Oxford management says, and that's simply not a position I'm comfortable with when it comes to managing money.

Adios, Oxford.

-- Gregory Markus (TMF Boring)