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Healthways Inc. (NASDAQ:HWAY) shares soared after two Piper Jaffray analysts upgraded the company to "Overweight" from "Neutral" and also increased their target price from $11 to $19. After the report, the company's share price increased by an approximate 10% to $14.82.

In its most recent results, the company reported a negative EPS of $0.12. The revenues were somewhat stable as compared to the previous year; however, the company was significantly affected by the termination of its contract with CIGNA in February 2013, which was one of the company's largest customers. Accounting for unusual events, such as cost incurred due to early termination of contracts, the company was able to improve its efficiency as it managed to achieve some economies of scale in some parts of its operations. The primary source for the company's losses was high amortization and depreciation expense in relation to its Embrace platform, which accounted for more than 8% of the company's revenues.

The Company & Future Prospects

Healthways Inc. is a small cap growth oriented company providing specialized solutions to help its customers adapt a healthier lifestyle. The company uses predictive tools in order to improve people's well-being by providing personalized intervention and prevention solutions.

The company has been expanding through various acquisitions, developments and strategic partnerships. Its acquisition of Navvis & Company, an established provider of strategic and change management services will enable the company to achieve its broader goal of better healthcare services in society. The company's global joint venture with Gallup is aimed at producing the next generation of Gallup-Healthways individual well-being assessment tools to provide employers, health providers, insurers and other entities with validated tools to assess, measure and report changes in the well-being of its customers. Furthermore, the company has had a strategic alliance with Gallup since 2008, and has conducted a survey to create definitive measures and an empiric database of changes in the well-being of the U.S. population. The survey has provided the company with an unmatched database of causes and effects of the well-being of a population. Together these two steps will make the company better equipped in providing its core business services of health management. This is because the extensive proprietary database, developed through research and analytical tools, provides the company with specific and verified relationships between healthcare problems and their root causes. For a company providing intervention and health management services, such as Healthways, it is essential to understand these relationships in order to recommend and execute the correct measures necessary to enhance the health of its clients and to mitigate the risk of potential serious healthcare problems. The database and these associated analytical tools, give the company a competitive edge over its peers in terms of understanding the potential health risk to its clients.

Another key development in the healthcare industry has been the new Patient Protection and Affordable Care Act, the so called "Obamacare Act", which would considerably increase healthcare costs. This is going to be extremely beneficial to companies operating in the healthcare sector. The key provisions of the act are expected to come into effect in 2014, and estimates suggest that it would result in an increase in costs by at least 5%. Another impact of the regulation would be an increase in the number of insured individuals, and this provides an additional benefit to the healthcare service providers. By identifying these future impacts and realizing the expanded growth opportunities created by the regulation, Healthways has strategically enhanced its investment activities in order to take advantage of these crucial changes in the industry.

According to the Piper Jaffray analysts, Healthways is a domain expert in population health management, and yet controls less than one percent of the $1 billion-per-year market. The analysts further expect the company to become the market leader in the growing population health management niche. This is because, as stated earlier, the company has invested heavily in building their database, either through their strategic alliance with Gallup or through ongoing enhancements in its proprietary technology platform known as Embrace. With these pools of data the company has positioned itself in a position to provide population management solutions, especially targeting the elderly sector.


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The U.S. demographics have changed significantly in recent years, and are expected to change further in the future. A slowing birth rate and approximately 10,000 baby boomers turning 65 years old each day for the next 20 years, a phenomenon termed as the "silver tsunami" will cause an ever aging US population. According to the most recent stats, the 65-plus population category grew by almost 13%, which is evidence to the fact that the American population is aging. Thus, American demographics have also played in favor of the company, as an aging population combined with the company's specialty in providing growing population health management solutions would certainly reap in significant benefits for the company.

Conclusion

A small cap growth stock such as Healthways will not generate any cash flow returns to investors, either in the form of dividends or share buybacks. But the significant potential for the company to increase its clientele and the capabilities that the company holds would definitely help Healthways to enhance its market position. As a result, the company has a high potential to increase in value and provide significant capital gains to investors. However, these benefits are only going to materialize in the long term, thus I rate the stock a long-term buy.

Source: Healthways Inc. - Upgraded By Piper Jaffray Analysts