We are long Wellcare Health Plans (NYSE:WCG) in our Clear Mid Cap Growth portfolio. This is exactly the type of business which saw its market cap fall based on what I believe to be trader and market over reaction to the election results.
This Florida-based managed care provider fulfills a support role for government-sponsored healthcare programs throughout central and eastern United States. WCG functions include claims processing and medical management. The firm offers products including Medicaid and Medicare programs, as well as prescription drug plans.
In accordance with the projected growth of government-sponsored health plans with the steady march of baby boomers towards retirement, managed care providers stand to see sufficiently promising revenue prospects. Among those, WCG is perhaps the earliest and most promising movers in light of recent third quarter earnings figures which cited a revenue increase of 104% to $1 billion over the same period in 2005. Total membership figures also demonstrated a high degree of company-wide success, growing by over 150% to top 2 million. Much of this was attributable to the launch of a nationwide prescription drug plan at the start of the current calendar year, with membership already nearing the one million mark.
Additionally relevant to a current analysis of WCG is the impact of recent Congressional elections resulting in a firmly established Democratic majority in the House of Representatives. Citing Democratic plans to reign in prescription drug reimbursement spending, traders feared a decline in historically superb earnings, precipitating a decline in WCG share value. However, it is our belief that the potential changes contemplated by Congress will only open more doors for this provider, adding revenue and profitability with additional scale.
On a trailing twelve month basis, WCG gross revenues rose by 75.79%, with a corresponding net income growth of 52.32%. Over a longer term, the WCG five year growth rate of 17.8% places the firm at the forefront of competitors within the industry. Profitability has also remained steady, with an operating margin of 5.43% and return on asset [ROA] and return on equity [ROE] figures of 8.67% and 21.87% respectively.
Viewed in light of valuation measures, namely a low price to earnings to growth [PEG] ratio of 0.53 compared to an industry average of 1.55, WCG fails to lose its appeal and more than compensates for a price to earnings (P/E) ratio (excluding extraordinary items) of 27.53 compared to the 17.8 industry average. As a result, our algorithms and our common sense continue to predict excess returns from the holding, yielding benchmark-beating results for our investors.
Disclosure: Author is long WCG
WCG 1-yr chart: