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On Jan 13, we downgraded our recommendation on Healthways Inc. (HWAY - Analyst Report) to Underperform from Neutral. We are disappointed about HWAY’s third-quarter 2013 results as both the company’s top line and bottom line lagged the respective Zacks Consensus Estimate. Further, the company lowered its 2013 guidance based on the dismal results in the first nine months of 2013.

Why Downgraded?

On Oct 24, Healthways’ earnings per share dropped by a whopping 66.7% to 5 cents from the year-ago level of 15 cents and also missed the Zacks Consensus Estimate of 11 cents. Net income came in at $1.8 million, down 64% from $5.0 million a year ago.

Lower participation in the company’s wellness programs as a result of significant headwind in the underlying industry, led to the downfall. Moreover, management had overestimated the number of risk lives available in 2013 for its total population management services to health systems.

Revenues remained flat year over year at $166.6 million in the quarter, trailing the Zacks Consensus Estimate of $185 million. However, excluding the two terminal contracts (including the one with Cigna Corp.), revenues improved 14.2% year over year.

HWAY scaled down its full year-2013 revenue expectations to the range of $665–675 million from the earlier range of $710–$750 million. Fourth-quarter revenues are forecasted in the band of $171 to $181 million.

Healthways also tweaked its bottom-line outlook to reflect slower-than-anticipated market transition rate of risk-based lives to Accountable Care Organizations (ACOs). Management anticipates loss per share of about 4 cents to 10 cents compared with the prior outlook of earnings per share of 18 cents–28 cents for 2013. Fourth-quarter 2013 earnings are expected in the range of nil to 6 cents.

Following the release of third quarter results, the Zacks Consensus Estimate for 2013 earnings fell significantly to a loss of 7 cents from earnings of 22 cents. The Zacks Consensus Estimate for 2014 earnings also declined 48.1% to 28 cents per share. Currently, HWAY retains a Zacks Rank #5 (Strong Sell).

Uncertainty about healthcare reform and a sluggish economy exert a negative impact on new business. Continued high unemployment in the U.S. implies fewer lives covered by employer sponsored or commercial health plans. This reduces the number of billable lives using Healthways’ disease management services, and consequently the company’s revenues.

Other Stocks to Look For

Some better-ranked stocks that are performing well in the medical services industry include Air Methods Corp. (AIRM - Snapshot Report), Covance Inc. (CVD - Analyst Report), and Envision Healthcare Holdings, Inc. (EVHC - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).
 

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