Managed health-care company Amerigroup (NYSE:AGP) will report first-quarter 2007 financial results on Tuesday, April 25.

What analysts say:

  • Buy, sell, or waffle? With 15 analysts covering the Motley Fool Stock Advisor recommendation, two-thirds have offered second opinions and say hold. While one says it's on the road to recovery and rates it a buy, four more say the condition is terminal and rate it a sell.
  • Revenues. It can't be because of any revenue slump, because revenues are expected to jump 22% to $825 million.
  • Earnings. And profits are expected to rise 42% to $0.34 per share.

What management says:
Revenues or profits don't have the analyst community concerned; it's that sword of Damocles hanging over the company's head. As it proved last quarter, Amerigroup has the ability to generate rising membership rolls and increased premiums, but it also has a nasty legal legacy, what with its Illinois subsidiary having been found guilty of discriminating against poor, pregnant women. Last month, a federal judge imposed more than $190 million in civil penalties against the insurance provider, bringing the total the company owes to more than $334 million. If it loses its appeal, Amerigroup would obviously take a substantial hit that would warrant  caution on the part of investors.

Chairman and CEO Jeffrey Waters says the company will appeal. Amerigroup "acted at the direction and with knowledge of the Illinois Department of Public Aid ... our Illinois subsidiary repeatedly disclosed its marketing training programs to IDPA and they agreed with those programs." It wasn't the IDPA that filed suit against Amerigroup, but rather a former employee.

What management does:
Although Amerigroup has been able to increase its rolls and premiums, leading to widening margins -- an increase of 410 basis points in trailing gross margins last quarter alone -- the reality of the court decision has sobered up Amerigroup's management, and it has lowered its earnings guidance for the full year. Even so, while the company had forecast profits of as much as $2 per share for 2007, it lowered the top end of its forecast by only $0.04.

























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
While management may be certain its actions in Illinois are proper, it would have been better if it had begun setting aside something for the possibility of losing the case, even if it was a drag on performance. As it is now, with no reserves set aside for paying the fines, the hammer blow would indeed be significant if the decision isn't overturned, or at a minimum, the penalties imposed aren't reduced. Amerigroup has recently raised more than $200 million by issuing convertible bonds, so it does have the ability to attract significant capital. However, with so much uncertainty surrounding the company's finances at this point, an investment here can't be advised.

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Fool contributor Rich Duprey  does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.