Magellan Health (MGLN) has recently seen a big drop in 2014 Earnings Estimates which has pushed the stock to a Zacks Rank #5 (Strong Sell) and that has made it the Bear of the Day.
Solid Earnings History
It is not that usual for a company to be a Zacks Rank #5 (Strong Sell) and have a string of six consecutive beats. Even more perplexing is the most recent beat, which was huge, yet the stock closed lower in the session following that report.
All of this calls for a deeper dive into this stock.
Magellan Health Services is the country's leading behavioral managed care organization. Its customers include health plans, corporations and government agencies.
Estimates Moving Lower
Estimates for MGLN have been rising through the 2013 calendar year. The Zacks Consensus Estimate moved from $3.71 in February to $3.86 in July and is now at $4.70. A move higher of nearly $1.
The problem is that 2014 Estimates are just not as good and they have been moving in the other direction. In February, the 2014 Zacks Consensus Estimate was $4.28 and then fell to $3.35 in July and is now $2.57.
As bad as the fall in estimates is, the idea of severely decelerating earnings growth in the coming year is just not what investors want to see. This year over year decrease is a major component in the Zacks Rank algorithm.
With the falling earnings estimate, one might think that the forward PE would end up falling below the industry average. That is not the case for MGLN, as the 24x forward PE still sports a sizeable premium to the 15x industry avereage. The price to book multiple shows the stock trading at a discount to the industry average, and the price to sales multiple has the company trading in line with the industry average. The concern has to be with the minimal expected revenue growth of 1.9% vs 5.6% for the industry average and the fact that earnings are expected to fall by 45% compared to an increas of 12.5% for the rest of the industry.
The price and consensus chart shows a pretty crazy picture. Lines going in all directions tells me a few things. First the lines that are not black are the earnings estimates for particular years. When the lines cross, it is not a end of world event ala 'Ghostbusters', but it is unusual. To me, it means the analysts are not getting a consistent idea of where earnings are headed. That limited visibility is not something Wall Street likes to have. That said, the wild move in estimates also says that the stock doesn't seen to care too much about earnings. As much the estimates have fallen, the stock has held still here, so investors are keying on something else. The Zacks Rank is all about earnings estimates, so in a situation like this, its best to diver super deep into the story, or look for a better play where earnings can give you an edge.
Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.
Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy. Subscribers get daily emails along with buy, and sell alerts.
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