Amerigroup with Regulators Ahead

Amerigroup Corp. (AGP - Analyst Report) is the largest and most diversified publicly traded Medicaid managed-care provider in the U.S. Excluding a one-time charge of $234.2 million associated with the settlement of the outstanding qui tam civil litigation, the company reported better-than-expected adjusted net income in the second quarter. However, we believe as a result of the qui tam litigation, Amerigroup will face greater regulatory scrutiny in future contracting activities.

Growth via acquisition remains a key element in the management’s corporate strategy. We believe Amerigroup’s established relationships with state government payors, substantial regulatory expertise and solid cash position augur well for entry to new markets and bolt-on acquisitions to existing operations. Furthermore, the company is well diversified geographically and across several Medicaid populations, which reduces the potential impact of reimbursement rate changes by any single state.

The settlement of qui tam removes a significant source of legal and financial uncertainty, and we are encouraged by the revenue diversification initiatives such as the entry into long-term care programs in New Mexico. Nonetheless, financial challenges still remain in key areas, as demonstrated in Tennessee, in terms of management of medical costs.

Individual state budget issues may adversely affect the company through lower Medicaid reimbursement rates or changes in eligibility criteria, often on a retrospective basis. We retain a Hold rating at current levels.

We have valued the stock on a forward price/earnings (P/E) basis, as well as a comparison to similar firms in the managed care sector. Our $28 price target represents a 12.2 x fiscal year 2008 EPS of $2.30.

Read the full analyst report on AGP