Magellan Health, Inc. MGLN has been witnessing downward earnings estimate revisions, of late. The Zacks Consensus Estimate of $4.70 for 2020 has moved down by 2.1% over the past 60 days. This indicates that analysts are bearish on the stock.
So, what could be the reason for this pessimistic stance? The company’s revenues declined 2.1% year over year in the first nine months of 2019. This year-over-year decline in the top line can be attributed to pressure in Pharmacy Benefit Management business (PBM), which suffered from health plan contract loss due to an acquisition.
The company is also suffering from pressure in its Behavioral and Specialty Healthcare business, primarily due to higher than anticipated demand for behavioral inpatient services.
For 2019, the company expects total revenues of $7 billion to $7.2 billion, implying year-over-year decline of 3% (calculated at the mid-point).
Further, the company expects cost of care pressure in its behavioral and specialty health business and severance charges related to its operational improvement initiatives to weigh on 2019 earnings.
The company’s return on equity (ROE) undermines its growth potential. Its trailing 12-month ROE of 3.2% compares unfavorably with the industry’s average of 18.6%, suggesting its inefficiency in using shareholders’ funds.
Though this Zacks Rank #4 (Sell) stock has performed well in 2019 and increased 26.7%, outperforming the industry’s growth of 20.5% and Zacks S&P 500 Composite’s rally of 25.6%, the above mentioned concerns are likely to have hurt investors’ sentiments to some extent. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other industry players like Humana Inc. HUM, UnitedHealth Group Inc. UNH and Anthem Inc. ANTM rose 31.9%, 20.6% and 18.6%, respectively, during the same time frame.
Nevertheless, management’s continued execution of cost-of-care initiatives for Magellan Complete Care Virginia and other healthcare contracts, rate increases in its healthcare business in excess of care trend and net business growth should alleviate much of the earnings pressure in 2020. We expect more clarity on this front during the fourth-quarter earnings call.
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