Upside Potential in Health Care

09/19/2003 12:00 am EST

Focus:

Richard Moroney

Editor, Dow Theory Forecasts

"To hedge the risk of increasingly aggressive cost containment in health care, we use two approaches," says Richard Moroney in Upside. "First, we emphasize innovation leaders. Second, we focus on companies that should benefit from cost-containment efforts, including health-plan administrators and generic drug makers." Here, he reviews five top cost-containment plays.

"AmeriGroup (AGP NYSE), one of the nation’s largest Medicaid managed-care companies, serves more than 800,000 members in Florida, New Jersey, Texas, Illinois, Maryland and the District of Columbia. The company has delivered on the financial results, growing sales from $660 million in 2000 to $1.2 billion in 2002. In the six months ended June, sales jumped 42% while per-share earnings jumped 36%. For full-year 2003, the company expects per-share earnings of $3.00 to $3.05. At 14 times expected 2003 earnings, the stock seems reasonably valued considering its growth prospects and balance sheet. AGP is being initiated as a Buy.

AmeriGroup

"Centene (CNTE NASDAQ), a leading provider of managed-care programs related to Medicaid, has gained 46% since we initiated coverage on Jan. 30. Even with the strong performance, the shares represent a compelling value. Centene helps state governments reduce the expense of providing health care for low-income residents, mostly children. In the June quarter, total membership surged 54%. Per-share earnings are expected to jump 34% in 2003 and 12% in 2004. At 16 times expected 2003 per-share earnings of $1.72, the stock is attractive relative to its long-term projected profit-growth rate of 20%. The stock is a Best Buy.

Centene

"SICOR (SCRI NASDAQ), a leading maker of generic injectable drugs, has benefited from an accelerated shift toward lower-priced medications. SICOR offers cost-effective treatments mainly in oncology, anesthesiology and critical-care therapy. A promising product pipeline should drive sales and earnings. The stock dipped Aug. 12 after Jack Stover, CFO, resigned to pursue other opportunities, but rebounded sharply when Merrill Lynch upgraded the stock to buy from neutral. SICOR offers plenty of upside given its attractive market niche and reasonable valuation. The stock, trading at 20 times expected 2003 earnings of 95 cents, is a Best Buy."

SICOR

"United Surgical Partners (USPI NASDAQ) owns and operates outpatient and short-stay surgery centers in the U.S., Spain and the United Kingdom. The company’s facilities, offering significant administrative and cost benefits to doctors, also yield savings for patients and insurers. In 2002, more than 280,000 patients used a United Surgical center. Wall Street expects full-year sales to reach $426 million, implying 28% growth. Earnings per share should range from $1.00 to $1.04, compared to 79 cents in 2002. In 2004, per-share profits are expected to climb 24% to $1.25. The stock, down 15% from its 52-week high, is rated Buy."

United Surgical Partners

"Universal American Financial (UHCO NASDAQ) offers a portfolio of supplemental life and health insurance products, primarily to seniors. June-quarter results were impressive, as operating income rose 36% excluding investment gains. Recent growth has been limited by slowing demand for Medicare-supplement policies, but any new limitations on Medicare reimbursement could boost demand for supplemental coverage. The company says it expects per-share earnings of 73 cents to 75 cents for full-year 2003 and 84 cents to 88 cents for 2004. At roughly 10 times expected 2003 earnings, the stock seems cheap considering the company’s track record and growth prospects. The stock is being initiated as a Best Buy."

Universal American Financial

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