JANA Partners opens new positions in MNK, OUTR, NWSA, and HUN and sells HMA and AET—13F Flash F

Market Realist

JANA Partners opens new positions in 3Q 2013 (Part 6 of 6)

(Continued from Part 5)

JANA Partners LLC is a value-oriented investment advisor specializing in event-driven investing exclusively for qualified investors. It was founded in 2001 by Barry Rosenstein. The fund primarily invests in the United States public equity markets and uses activist strategies, a market-neutral strategy, a long/short equity strategy, and a risk arbitrage strategy.

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

In this six-part series, we’ll go through some of the main positions JANA Partners traded this past quarter.

JANA Partners started new positions in Mallinckrodt PLC (MNK), Outerwall Inc. (OUTR), News Corp. (NWSA), and Huntsman Corp. (HUN) and it sold Health Mgmt Associates Inc. (HMA) and Aetna Inc. (AET).

Why sell Aetna Inc. (AET)?

Aetna reported third-quarter operating earnings per share of $1.50 in 2013, compared to $1.55 in 2012, missing analyst estimates of $1.53 per share. Aetna generated higher operating earnings and operating revenues year-over-year, bolstered by the acquisition of Coventry and continued strong performance in its Commercial and Medicaid businesses.

Its Medicare medical benefit ratio (MBR) was 87.8% in the quarter, an improvement of 130 basis points sequentially. The increase was primarily due to favorable 2012 experience reflecting in establishing customer premiums upon renewal in 2013 as well as underperformance in two specific Medicare product offerings and the impacts of sequestration on Medicare reimbursement rates. Its Group Insurance operating earnings declined both year-over-year and sequentially, primarily reflecting lower underwriting margins in its Group Life products due to higher claim incidence, partially offset by higher underwriting margins in its Disability products. Large Case Pensions, which manages a variety of discontinued and other retirement and savings products, primarily for qualified pension plans, reported operating revenues of $113.7 million for the third quarter of 2013, compared to $124.3 million for the third quarter of 2012.

Based on its year-to-date performance, Aetna projects 2013 operating earnings of $5.80 to $5.90 per share. This guidance, which would represent growth of 14% over 2012 at the midpoint, reflects strong performance in its Medicaid and Commercial Insured businesses, as well as continued execution of its expense management initiatives offset by the pressure in its Medicare and Group Insurance businesses.

It said in its 10Q filing that on April 1, 2013, Center for Medicare and Medicaid Services (CMS) published final Medicare Advantage and prescription drug program, or PDP, premium rates for 2014. These rates reflect a material reduction in 2014 premiums compared to 2013 for Medicare Advantage and PDP plans. This is in addition to the challenge the company faces from the impact of the industry-wide health insurer fee (or HIF) that will become effective January 1, 2014. The final 2014 rates represent a meaningful revenue and operating results challenge for Aetna and other Medicare Advantage and PDP plans. The company can’t predict future Medicare funding levels or ensure that changes in Medicare funding won’t adversely affect its Medicare operating results.

Aetna is one of the “Big Five” managed care companies, alongside WellPoint (WLP), UnitedHealth (UNH), Cigna (CI), and Humana (HUM). Insurers have faced uncertainty in the past arising out of the implications of the Affordable Health Care Act on issues ranging from technical glitches with the government’s online insurance marketplace to Medicare Advantage cuts and tax on premiums. However, analysts expect the big insurers to gain from the funding for the expansion of Medicaid and enrollment of new customers.

AET

Before starting JANA Partners, founder Barry Rosenstein was the managing partner at Sagaponack Partners, a private equity fund. Rosenstein is a CPA. He received his MBA from the Wharton School of Business at the University of Pennsylvania in 1984 and his BS from Leigh University in 1981.

JANA, which has approximately $7 billion under management, applies a fundamental value discipline to identify long and short investment opportunities that have one or more specific catalysts to unlock value. In certain cases, JANA can be an instrument for value creation by becoming an actively engaged shareholder.

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