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).