Friday, July 2, 2010

Coventry Health Ups Guidance - Stock Limps Higher

Cheap, cheap, cheap. Amazing how truly bearish this market has become. All earnings expectations are scrutinized to the nth degree. Even a strong company like Coventry Health (CVH) can up guidance for 2010 by nearly 10% and see the stock barely react with the PE at only 6.7. The stock has been down 35% over the last couple of months.

How did we get to a point where investors are so bearish that they completely ignore fundamentals? Sure CVH is in the healthcare sector and Obama's new healthecare bill raises alot of concerns in the industry, but CVH has had a couple of months to study the impacts and they are comfortable enough to up guidance.

  • Excluding a beneficial impact from Medicare Advantage private payments of 28 cents per share, the forecast range of $2.47 to $2.62 is well above the consensus $2.31 analysts have been projecting. ($2.55 midpoint)
In addition they also recently made an accretive acquisition on 6/30. Mercy Health Plans has roughly 180K members providing CVH with a increase in customers. This is the 2nd deal they've made this year while the industry is in limbo likely allowing CVH the opportunity to snap up competitors on the cheap and reduce competition.

  • Mercy Health Plans is a diversified health plan with approximately 90,000 commercial risk members, 60,000 commercial self-funded members, and 30,000 Medicare Advantage Coordinated Care members throughout Missouri and northwest Arkansas.
  • expected to be slightly accretive to earnings in 2011.
So if we've got a stock that just provided much improved guidance for 2010, why did the stock price struggle to only a 1.8% gain? Any why have they fallen so far, so fast in a period where internally they were moving up projections? An investor no longer has to fear a potential hit on Q2 earnings and we think providing a solid entry point. Healthcare stocks remain very hated, but the price more then reflects that opinion.





Disclosure: No position (yet).

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