WCG

[David Randolph]

Hi David,

  If you don't mind, could I ask you the source/service you use to get the historical share count information? Your valuation approach is excellent!

I use the following link Dory99: http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=wcg&lstStatement=10YearSummary&stmtView=Ann

Thanks

[Dory99]

Thanks again, David. 

[David Randolph]

Thanks again, David. 

You're welcome Dory99

WCG finally closed above $90, at a new all time closing high.

I'm interested in studying WCG's balance sheet:



Nothing special on this balance sheet, the cash pile will probably surpass $1 B in Q1 2007. I'll stay with the 1.02 dilution factor.

Tomorrow we'll study revenues and gross margin.

I'll keep holding WCG.

[David Randolph]

WCG's results will be out on May 8:

• WellCare Health Plans, Inc. Earnings Call scheduled for Tue, May 8
CCBN (Mon 5:10pm)

Until then we have time to set up the new valuation model perfectly and then make the necessary adjustments when the quarterly results become public.

I was going to study revenue trends for WCG today, but I'll leave it for tomorrow because I had other things to do (the 3 SOF Strategy Disclosed document has 14 pages instead of 10 ) and I'm quite sleepy now. Don't wait up for today's updates, I'll write them before tomorrow's open.

See ya

[ravenquork]

This just came across my news service:

Link to original article:  http://www.tbo.com/news/money/MGB2EN12D0F.html

Published: Apr 11, 2007

TAMPA - Just as the Florida Legislature begins consideration of an 11.7-percent increase in Medicaid HMO rates, two leading Wall Street analysts have issued written warnings that the state's payments already are too high.

They say overpayments help explain the meteoric rise of WellCare Health Plans Inc., which has two Florida HMOs that account for about half of the state's Medicaid managed-care enrollment. Its $90-a-share stock price has doubled in the past year.

CIBC World Markets and Goldman, Sachs & Co. both say WellCare has been able to give state regulators the impression that its profits are slim by shifting money to a WellCare subsidiary in the Cayman Islands in the form of reinsurance premiums.

While legal, the analysts say, this WellCare arrangement masks the true picture of the plans' profits. As CIBC's Carl McDonald put it, "Florida appears to be overpaying its Medicaid plans, and it would seem to be only a matter of time before the state figures this out."

Goldman, Sachs and another firm, CCI Healthcare Partners, have teams examining the April 1 WellCare filings with state insurance commissioners in Florida and New York, trying to figure out what enables the Tampa-based company to be so much more profitable than its competitors.

"They're making tons of money," said Oliver Marti, a partner and portfolio manager at CCI, a Stamford, Conn., investment firm. "How does the government allow that?"

The answer, according to CIBC's McDonald and Matthew Borsch, vice president of Goldman, Sachs, is that WellCare is able to shift millions in profit to a sister company, Comprehensive Reinsurance Ltd., in the Cayman Islands.

WellCare's Florida plans sent $62.8 million to the Caymans company, which paid out $31.7 million, the filings show. Most managed-care plans have reinsurance margins of zero to 4 percent, Borsch said, but WellCare's was many orders of magnitude higher. The Florida plans would have reported earnings 66 percent higher than they did if they had kept reinsurance payments in line with the industry, Borsch said.

WellCare questioned both Borsch's motives and math.

"Analysts often sensationalize routine information to generate trading volume and profit," wrote spokeswoman Carol Cassara in the first of several e-mails to The Tampa Tribune in response to claims made by Borsch and others.

Not only is it legal for WellCare to conduct business with an affiliated company, she wrote, the arrangement was approved by Florida regulators in advance.

Jonathon Kees, spokesman for the Florida Office of Insurance Regulation, confirmed that an actuary there approved WellCare's Cayman reinsurance affiliate. Kees noted that his agency's main duty is to make sure insurers have sufficient assets to cover their risk.

The decision to seek the 11.7-percent rate hike for Medicaid HMOs came from Florida's Agency for Health Care Administration. Dyke Snipes, assistant deputy secretary for Medicaid finance with the AHCA, said the managed-care payments are pegged to the traditional Medicaid fee-for-service plan. Snipes said he found the suggestion that HMO payments were too generous "surprising" and said he'd have his staff study the Goldman, Sachs analysis.

Medicaid pays HMOs monthly payments to cover medical treatment for enrollees. If the plan spends more on a member, it loses money, and if it spends less, it makes a profit. Most Medicaid beneficiaries are healthy children, but the program has high costs for some disabled children and adults.

Florida Medicaid HMO payments, which vary by gender, age and geography, average $199.40 per member per month this year, Snipes said. If the AHCA budget passes as submitted, that rate will rise to $222.73.

WellCare set up its reinsurance arrangement with a trigger of $50,000. A member who has more medical costs than that will be taken over by Comprehensive Reinsurance Ltd.

Cassara, the WellCare spokeswoman, said the Goldman, Sachs report errs by applying Wall Street-style analysis to a Medicaid arena.

"The report uses aggregate data to make assumptions that are not reflective of our multiple lines of business," she wrote in an e-mail to the Tribune.

The company says its 2006 net income margin was only 3.7 percent, "lower than many of our competitors in the industry," Cassara wrote.

But Goldman, Sachs and CIBC World Markets say they calculate the company's income in double digits.

"The issue is that Florida relies primarily on data regarding cost-trend increases to determine rate increases, rather than profitability." McDonald wrote in his analysis for CIBC investors in March.

"Therefore, it will likely take some kind of external influence to convince the legislature in the state that Medicaid managed care payment rates could be a source of savings," McDonald said in the report.

The state doesn't take related entities into account in figuring the margins for Medicaid HMOs, but Wall Street analysts do. McDonald and Borsch used GAAP analysis - generally accepted accounting principles - to determine that Florida plans are making more profit than it appears and spending less on medical treatment: 81 cents of the premium dollar.

WellCare deals exclusively with government clients. About half of its members are Medicare beneficiaries in prescription drug plans. The beneficiaries are scattered across the nation. The other half are in state Medicaid plans.

In Florida, WellCare is by far the largest Medicaid plan, with more than 450,000 enrolled. AmeriGroup is second, with about 200,000. Of the $1.7 billion the state paid HMOs last year, WellCare's two plans took in half, almost $850 million.

Reporter Carol Gentry can be reached at (813) 259-7624.

[David Randolph]

Thanks for the very interesting article ravenquork, it didn't appear on my news service or in Yahoo. If we filter all the discussion, the current plan is to increase Medicaid HMO rates by 11.7%, which is great news for WCG. We'll see if those two analysts get away with their claims, but I don't think so, since WCG seems to be right when it says its profit margins are lower than the industry average:



It is really weird to see Wall Street analysts complaining about excessive profitability, I wonder what their motivation is

Let's move on with the study of the revenue trend:



Given recent growth rates and the ones expected for the future, I believe it is reasonable to assume a revenue CAGR estimate of 1.3, I don't see why growth should decelerate as much as analysts predict, since in fact it has been accelerating over the past few quarters.

Tomorrow we'll study profitability, and I'm also curious about the adjustments to revenue that were in the order of $240 M in 2006. Are more profits hidden here? We'll check that out.

In the meantime, WCG looks very attractive, I'll continue holding the stock.

[ravenquork]

Interesting that this news comes out on the heels of the report in the Tampa Tribune, dated 4 days before the report.

On April 6, 2007, Imtiaz (MT) Sattaur notified the Registrant of his resignation as President, Florida effective immediately. Mr. Sattaur is departing to pursue other opportunities.

[David Randolph]

Interesting that this news comes out on the heels of the report in the Tampa Tribune, dated 4 days before the report.

On April 6, 2007, Imtiaz (MT) Sattaur notified the Registrant of his resignation as President, Florida effective immediately. Mr. Sattaur is departing to pursue other opportunities.

Yes ravenquork, people yesterday speculated that the facts were related, but I don't think this has a material impact on the fundamental trends of the company, and that's what drives the stock price over the medium to long term.

Today I'm not able to study the profitability of WCG or what those adjustments to revenue mean (I have to leave in a few minutes to take care of personal bureaucracy), but tomorrow I'll do that study (and there's plenty of evidence in this thread about the attractiveness of WCG as a long term investment).

In the meantime I'll keep holding WCG, as the stock yesterday touched its ascending support trendline and recovered some ground with volume above average:

[ravenquork]

Thanks for the very interesting article ravenquork, it didn't appear on my news service or in Yahoo. If we filter all the discussion, the current plan is to increase Medicaid HMO rates by 11.7%, which is great news for WCG. We'll see if those two analysts get away with their claims, but I don't think so, since WCG seems to be right when it says its profit margins are lower than the industry average:

It is really weird to see Wall Street analysts complaining about excessive profitability, I wonder what their motivation is

Let's move on with the study of the revenue trend:

Given recent growth rates and the ones expected for the future, I believe it is reasonable to assume a revenue CAGR estimate of 1.3, I don't see why growth should decelerate as much as analysts predict, since in fact it has been accelerating over the past few quarters.

Tomorrow we'll study profitability, and I'm also curious about the adjustments to revenue that were in the order of $240 M in 2006. Are more profits hidden here? We'll check that out.

In the meantime, WCG looks very attractive, I'll continue holding the stock.

In your report, you show over all ttm operating margins for WCG at 6.47% vs 7.87%  for the industry. On the face of it it looks like WCG has a low operating margin, therefore, it is likely the rate increase in Florida to go through.
While the table is very helpful, It does not reflect the fact that reimbursement rates are set by each individual state. In my mind, the better question to look at is a comparison of reimbursement rates for the top customer states.

I am not sure but I think Florida is one of the companies most profitable states. I don't think it is possible, due to the off shore transactions, but it would be good to know the operating margin for Florida compared to the other top states. 
My concerns are that-

Florida's margins might actually be relatively higher, off setting lower margins in other states. In that case, Florida may not grant the rate hike. This could , depending on margins in other states and their percentage contribution to the bottom line, could impact future margins in a disproportion manner.

Given the potential for, and unpredictability of political influences on rate decisions, if WCG is hurt in Florida, other States would most likely look to adjust reimbursement rates downward.

Since the questions I pose seem to be unanswerable, predicting stock valuations becomes somewhat more guess work and a little less analysis.  It does, in my mind, create a higher level of risk that needs to be factored in.

Today I'm not able to study the profitability of WCG or what those adjustments to revenue mean (I have to leave in a few minutes to take care of personal bureaucracy), but tomorrow I'll do that study (and there's plenty of evidence in this thread about the attractiveness of WCG as a long term investment).

I agree that there is plenty of historical evidence for this stock to be a great investment, but there are unquantifiable, but real and significant threats that could impact share price.

Bye the way, I do own the stock, but with weaker hands than most of my other holdings.

[David Randolph]

I am not sure but I think Florida is one of the companies most profitable states. I don't think it is possible, due to the off shore transactions, but it would be good to know the operating margin for Florida compared to the other top states.

Unfortunately the company doesn't breakdown and disclose this type of information

Florida's margins might actually be relatively higher, off setting lower margins in other states. In that case, Florida may not grant the rate hike. This could , depending on margins in other states and their percentage contribution to the bottom line, could impact future margins in a disproportion manner.

Given the potential for, and unpredictability of political influences on rate decisions, if WCG is hurt in Florida, other States would most likely look to adjust reimbursement rates downward.

But, what seems to be in discussion is a rate hike of 11%, nobody is talking about lowering reimbursement rates for Medicaid or Medicare in Florida. Anyway, WCG's growth isn't coming from Florida, in fact, its presence there is shrinking, at least in the number of subscribers (which is the only information that is broken down state by state):

«During 2006, our overall membership in Florida decreased from approximately 545,000 members to approximately 525,000 members.»

Since the questions I pose seem to be unanswerable, predicting stock valuations becomes somewhat more guess work and a little less analysis.  It does, in my mind, create a higher level of risk that needs to be factored in.

I agree that there is plenty of historical evidence for this stock to be a great investment, but there are unquantifiable, but real and significant threats that could impact share price.

I agree, the risks you mention exist. But, the issue on the table now is: "will net profit margin in Florida increase or stay more or less the same?"

Let's take a look at the quarterly EPS growth:



The compound quarterly growth rate, between Q1 2006 and Q4 2006, is 35%. If this growth rate continues in 2007, we'll get the following quarterly EPS numbers:



If this happens and WCG trades at the Health Care Plans industry average earnings multiple of 18.3, WCG will be a $234.42 stock by the start of 2008.

Perhaps I'm being too optimistic, expecting the 2006 growth rate to be maintained, but who knows? At least this is the current fundamental trend, and that's what we have to believe.

I also couldn't figure out why the adjustments to revenue, but if the difference is some kind of hidden profit, again, the stock would go higher.

I believe there's enough growth potential here to put risks aside and keep on holding WCG as a long term investment. That's what I'll keep on doing.

[ravenquork]

But, what seems to be in discussion is a rate hike of 11%, nobody is talking about lowering reimbursement rates for Medicaid or Medicare in Florida. Anyway, WCG's growth isn't coming from Florida, in fact, its presence there is shrinking, at least in the number of subscribers (which is the only information that is broken down state by state):

«During 2006, our overall membership in Florida decreased from approximately 545,000 members to approximately 525,000 members.»

I believe there's enough growth potential here to put risks aside and keep on holding WCG as a long term investment. That's what I'll keep on doing.

Another Florida paper published an article concerning private Medicare plans tittled: 

U.S. pays big bucks to private Medicare
Seniors like the lower costs, but some health officials say the plans can't last much longer.

Link to article ( only active for two weeks) : http://www.orlandosentinel.com/orl-medicare1507apr15,0,4282518.story?page=2&track=mostemailedlink

David, excellent work on the portfolio! Lower stress, less time and good performance, what more could an investor want? 

[David Randolph]

Thanks for the interesting and informative article ravenquork, please keep them coming

Today let's study the 3rd variable we need to derive WCG's valuation model, the net profit margin:



My net profit margin for 2007 leads me to higher than average EPS estimates. For example, for 2007, analysts are expecting EPS of $4.17, but, if the company maintains the 4Q 2006 net profit margin of 5.21%, according to the same analyst's revenue estimate of $4.88 B and 3% dilution in 2007 (in fact I just saw I've estimated 1.02 as the dilution factor in previous updates), EPS will come in at $5.21 against just $4.17 expected by analysts on average:



Given the information I get from this thread, the valuation model looks like this:



Well, WCG's results are worse than I expected, there isn't much inefficiency here. Anyway, the expected share price CAGR is still higher than 16%, at 21.9%, and the optimal selling price is just $104.62, so lacking a better idea for now, I'll keep on holding WCG.

David, excellent work on the portfolio! Lower stress, less time and good performance, what more could an investor want?

Thanks for your kind words Ravenquork

[David Randolph]

Today WCG traded at a new all time intraday high but closed just shy of it. I'll follow my fundamental model indications and keep on holding WCG until the optimal selling price of $104.40 is reached:

[David Randolph]

WCG closed at a new all time high today. Now we have the valuation model always updated on the Main Portfolio page:



WCG is the stock with less potential in the Main Portfolio, but probably also the safest investment. We still have 15% to go for me to sell the stock, if there's no new fundamental information.

I'll keep holding WCG.

[David Randolph]

Nothing new on WCG today, results will be out on May 7. I'll keep holding the stock.