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Magellan Health: A Strong Sell

Zacks Equity Research

On Dec 25, 2013, Zacks Investment Research downgraded Magellan Health Services Inc. (MGLN) to a Zacks Rank #5 (Strong Sell) from a Zacks Rank #3 (Hold).

Why the Downgrade?

Magellan Health has been experiencing declining earnings estimates on the back of deteriorated third-quarter 2013 results and a faltering guidance for 2014. Additionally, this specialty healthcare insurer underperformed the one-year Nasdaq index, which posed a growth of 37.9% against Magellan Health’s 10.1%.

On Oct 24, Magellan Health reported third-quarter 2013 operating earnings per share of $1.70, which beat the Zacks Consensus Estimate of $1.01. However, earnings declined 28% from the prior-year quarter figure of $2.36.

Top-line growth of 9.4% year over year was more than offset by 11.7% hike in total expenses. Even segment profit declined 14.7%, resulting in a deteriorated bottom line and operating cash flow.

Furthermore, management expects operating earnings per share of $2.00−2.56 in 2014, noticeably lower than that of $4.28−4.93 projected in 2013. Moreover, revenues are expected within $3.61−3.80 billion in 2014 against $3.5−$3.7 billion guided in 2013.

Given the uncertainty related to the healthcare reforms and increasing expenses vis-à-vis very nominal top-line growth, we believe Magellan Health’s target of achieving long-term compounded annual growth of 20%, in both revenue and earnings per share, appears delusionary.

Meanwhile, the Zacks Consensus Estimate for 2013 dipped 0.8% to $4.70 per share in the last 60 days. More significantly, the same for 2014 plunged 22% to $2.56 during the same period. Even on a year-over-year basis, the earnings per share for 2014 are projected to decline by 45.5%.  No upward revision in estimates was witnessed for both the years.

Other Stocks to Consider

While we prefer to avoid Magellan Health for the time being, some better-ranked insurers in the industry are HCI Group Inc. (HCI), The Hanover Insurance Group Inc. (THG) and Chubb Corp. (CB). All these stocks sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on CB
Read the Full Research Report on HCI
Read the Full Research Report on THG
Read the Full Research Report on MGLN

Zacks Investment Research