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Trio of analysts bestow top ratings on WageWorks

NEW YORK (AP) -- Shares of WageWorks Inc. rose more than 6 percent Monday, after a trio of analysts on Monday initiated coverage of its stock with top ratings, pointing to the company's strong business model and significant growth prospects.

THE SPARK: Stifel Nicolas analyst initiated coverage with a "Buy" rating, while David Scharf of JPM Securities rated the stock at "Market Outperform" and William Blair's Robert Napoli gave it an "Outperform" rating.

All three of the analysts work for investment banks that, along with Needham & Co., were the lead underwriters of the San Mateo, Calif.-based company's initial public offering earlier this month.

THE BIG PICTURE: WageWorks is an on-demand provider of employee spending account benefits programs. It allows workers to use pre-tax earnings to pay for things like health care and commuting costs.

After the postponement of its IPO in August, WageWorks shares priced at $9 on May 9, below their expected range of $10 to $12.

The stock gained 40 percent in its first day of trading to close at $12.60, but has since given back much of those gains, dropping as low as $10.12 in the weeks since and closing Friday at $10.80.

THE ANALYSIS: Both Grossman and Scharf said that demand for WageWorks' services will only grow, as employee out-of-pocket health care costs continue to increase.

They also noted that these kinds of services save money for both companies and their employees, because it reduces the amount they both pay in taxes. In addition, the company offers a high degree of visibility into the bulk its revenue at the beginning of the year, because health care revenue is locked in at that point, they said.

Grossman set a $15 target price for the stock, while Scharf set his at $14.

Napoli noted that despite the perks that come with these kinds of consumer-defined benefits programs, it appears that only about 30 percent of eligible workers participate in them. That means WageWorks has significant potential for growth, he said.

THE SHARES: Up 67 cents, or 6.2 percent, to $11.47 in afternoon trading, after peaking at $11.50 earlier in the day.