By and large, the health benefits sector is a land of giants, populated by huge companies including UnitedHealth
Sierra's fourth-quarter numbers won't look great on just a casual glance, and indeed, it has some 'splaining to do. Yes, revenue was up just 6% as reported, but the company lost about 6% of its prior revenue base when a contract with the military expired. Strip that lost business out, and the ongoing concern actually saw revenue climb by more than 12%.
The same goes for the profitability side, where the ongoing businesses did pretty well. Yes, the medical care ratio was up about two and a half points from last year, but it's still a very competitive number on an industrywide basis (and below both UnitedHealth and WellPoint). What's more, free cash flow was up about 9% from last year, so the company continues to grow where it counts.
Being focused tightly on Nevada is good news and bad news. Sierra is a low-cost provider of services, but it has no other regions to fall back on if things go soft for a bit. Likewise, some aspects of the business are still in flux. The state is going to rebid a Medicaid contract (thanks to a calculating error on the state's part) that Sierra thought it had won. The company also faces a contract renegotiation with HCA
HCA is a considerable force in Las Vegas, where it owns about one-third of the beds, but I think you can argue that both companies really do need each other. Sure, HCA will talk tough, as it has with orthopedics companies, but ultimately, there will probably be a mutually beneficial deal struck to extend the business relationship.
Sierra is a different kind of company in many ways. Management seems content to reinvest in Nevada rather than look elsewhere, and it seems pretty resistant to establishing an ongoing dividend. Still, just about any large health-benefits company in the country could be a potential suitor -- including second-tier players like Coventry
For more beneficial Takes on the health-benefits world:
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).