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On Sep 19, Zacks Investment Research reiterated its recommendation on Healthways Inc. (HWAY - Analyst Report) at Neutral following its narrower than expected loss but lower than expected revenues in the second quarter of 2013.

Why the Retention?

On Jul 24, Healthways reported second-quarter 2013 loss per share of 3 cents, narrower than the Zacks Consensus Estimate of a loss of 5 cents per share. Revenues declined 4.7% year over year to $162.3 million in the quarter, trailing the Zacks Consensus Estimate of $171 million. However, upon exclusion of the two terminal contracts, revenues improved 11.7% from the prior-year quarter.

Moving ahead, the company affirmed its sales guidance for 2013 in the range of $710 million-$750 million, reflecting growth of 5%-11% year over year. Healthways forecasts higher sales in the second half of 2013, as fresh contracts inked in 2012 will take off in the upcoming quarters.

However, the company tweaked its outlook for the bottom line to reflect the effect of its cash convertible senior notes due 2018. Healthways expect earnings per share of about 18 cents–28 cents compared with the prior outlook of 25 cents–35 cents for 2013.

The company’s earnings have managed to beat the Zacks Consensus Estimate in 3 out of the last 4 quarters, with an average surprise of 14.68%. However, following the earnings release, the Zacks Consensus Estimate for 2013 and 2014 dropped 20.7% and 6.7% to 23 cents and 54 cents per share, respectively, over the last 60 days. Currently, the stock has a Zacks Rank #3 (Hold).

Year 2013 is an important transitional phase for Healthways, wherein the company is aggressively trying to return to the growth path, following the loss of its largest Cigna contract. Brisk contract activity may enable the company to gradually get over the loss of the contract. HWAY has invested in technology platforms that provide scalable support for large populations.

Growth in the U.S. is expected to slow down, and total number of billable lives may stagnate, which will be partly offset by cross-sell opportunities. Moreover, HWAY considers itself to be a global well-being company though overseas contract wins have been restricted to just a few countries.

Other Stocks to Consider

Medical services stocks that warrant a look include Quintiles Transnational Holdings (Q - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy), along with Omnicare Inc. (OCR - Snapshot Report) and ICON Public Limited Co. (ICLR - Snapshot Report), both carrying a Zacks Rank #2 (Buy).

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