HealthSpring: Value in a Turbulent Market

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As equity markets continue to gyrate and investors fear another financial meltdown, companies with stable earnings and low sensitivity to economic conditions are becoming more attractive. Healthcare companies may be particularly attractive in the coming year as demand should remain stable and the healthcare reform initiatives from Washington are not likely to be as anti-business as originally feared. HealthSpring Inc. (NYSE:HS) is one company that offers quality care for Medicare recipients and is making a stable profit in the process.

HealthSpring offers healthcare programs primarily through Medicare in the states of Alabama, Florida, Illinois, Mississippi, Tennessee and Texas. The company has grown since going public in 2006 with earnings increasing consistently each year. However, the stock has not performed very well during the period as the earnings multiple has declined significantly. Currently the stock is trading at just 7.8 times expected earnings for 2010 – quite a bargain if the company continues to see such consistency in earnings growth.

Part of the reason the stock trades at such a low multiple is the fear that healthcare reform will reduce the profits available to the firm. Since HealthSpring works closely with Medicare patients, there is a reasonable fear that the company could see its margins squeezed as a result of the anti-business agenda of the current administration. However, with recent changes in political sentiment and some very clear backlash from voters, it is unlikely that healthcare reform will have the teeth to curb competitive business. My personal opinion is that a more competitive environment will result in higher quality care at lower prices. But, regardless of your political view, the news is good for HealthSpring and should bolster the company’s stock price in the coming months.

On February 8, the company announced strong earnings for the fourth quarter, earning 68 cents per share compared to 51 cents in the fourth quarter of 2008. For the full year, the company grew earnings by 13.7% to $2.41 per share. Revenue grew at a 25% clip over the quarter and management issued positive guidance for 2010. According to the CEO, HealthSpring should earn $2.25 to $2.50 in 2010, and we should keep in mind that management typically “sandbags” earnings expectations, promising low numbers so that they can beat expectations throughout the year. Analysts weren’t all that impressed as the consensus estimate for 2010 earnings has the company earning $2.27, but the good news for investors is that these estimates are likely to be beaten.

Shortly after the earnings announcement, the company issued another press release stating that HealthSpring had been able to refinance its debt with much more attractive terms. HealthSpring entered into a $350 million dollar senior secured credit facility which is divided into a $175 million dollar 5-year loan and a $175 million dollar revolving credit facility. The company used the proceeds from the loan and cash on hand to pay off its entire existing debt, which had been scheduled to mature in October of 2012. This gives the company more flexibility time-wise, and still leaves HealthSpring with a large war-chest of cash.

We believe that we are well positioned to capitalize on potential strategic opportunities created by both the current Medicare Advantage rate environment and healthcare reform. This new facility provides us with greater financial flexibility to, among other things, take advantage of such opportunities. -- Karey L. Witty, HealthSpring CFO

The “strategic opportunities” that Witty speaks about could easily be an acquisition of another provider in a different state. This would allow the company to increase its footprint and significantly grow its business. Since many firms are trading at a discounted value (both public companies and private providers), HealthSpring would likely be able to make an acquisition that would be immediately accretive to earnings. So the $2.25 to $2.50 in expectations for 2010 could very well be a conservative number.

So, despite a strong run in the stock since the March low from last year, HealthSpring is still a very attractive investment trading at a low multiple with significant potential for growth. I believe investors could see the price more than double over the next 12 months if investor sentiment becomes more amenable to owning healthcare companies. With a strong balance sheet, impressive opportunities and a low multiple, this stock appears to have a very attractive risk to reward ratio. (Click to enlarge)

Healthspring Inc. (<a href='' title='NW18 HSN Holdings'>HS</a>)

Disclosure: Author does not have a position in HS

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