Booming Medicaid Management Sector's Unusual Value

Nov.19.13 | About: WellCare Health (WCG)

By Dee Gill

Shareholders in Medicaid management companies already raked in big money this year, even though much of the nation still waits for the government to build a working website for insurance sales. Medicaid expansion, both related to the Affordable Care Act and not, has escalated share price valuations in the sector beyond comfort levels for many conservative investors. So it was a pleasant surprise to find one such growth company whose share price still looks tempting.

WCG PE Ratio (Forward) Chart
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WCG PE Ratio (Forward) data by YCharts

WellCare Health Plans (NYSE:WCG) was one of 39 companies that popped up when we set the YCharts Stock Screener to find growing companies with features that reduce the risks typical of growth stocks. These "Sane Growth" stocks combine modest share prices and strong fundamentals with recent revenue and profit gains in double digits. Read about the "Sane Growth" experiment here.

WellCare competes for Medicaid and Medicare patients with companies like Centene (NYSE:CNC), Molina Healthcare (NYSE:MOH) and WellPoint (WLP), as well as much larger companies like UnitedHealth Group (NYSE:UNH). These businesses have been growing for several years as states moved to privatize management of their Medicaid programs.

WCG Chart
(Click to enlarge)

WCG data by YCharts

WellCare missed out on some of the early business - an accounting scandal involving top executives in 2008 crippled growth - but the company eventually joined the sector rally. These investments saw particular gains following the Supreme Court decision last year that saved the Medicaid expansion provision in the Affordable Care Act, albeit in a slightly less bullish way than the companies had hoped. (States could opt-out.)

Because profit margins in this business are thin, competing well is all about raising membership numbers to push economies of scale. WellCare has won a lot of new business lately, including new Medicaid contracts in Florida and Medicare Advantage contracts in California and Arizona. Overall revenues are expected to rise some 26% this year and 16% next year. In 2014, earnings are expected to grow about 12%.

Aside from competition, the biggest threat for WellCare's shareholders comes from the government's ongoing effort to cut health care costs. WellCare has made a concerted effort to add Medicare Advantage plans, and the government loves to reduce reimbursement rates for that program and Medicaid. Its success depends on its ability to price its services wisely in a growing but very uncertain marketplace.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.