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MGLN's 2013 EPS Guidance Disappoints

MGLN HNT

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Earlier this week, Magellan Health Services Inc. (MGLN - Snapshot Report) revealed its earnings guidance for 2013. The company expects earnings per share (EPS) of $3.22–$3.85 for the year.

Additionally, Magellan disclosed the net revenue guidance range of $3.56–$3.74 billion for the year ahead. Further, net income is expected to stand between $91 million and $109 million, while segment profit is projected to be $250–$270 million. Segment profit refers to earning before income taxes and excludes stock compensation expense, depreciation and amortization, interest expense, interest income, gain on the sale of assets, and special charges or benefits.

Magellan’s projected 2013 EPS is substantially lower than the Zacks Consensus Estimate of $4.10. However, we expect the Zacks Consensus Estimate to go down once analysts start adjusting their estimates to include the impact of the company’s guidance. The Zacks Consensus Estimate for Magellan’s 2013 revenue stands at $3.62 billion, within the company’s guidance range.

The EPS guidance does not include the impact of any future share repurchases. However, it includes the impact of the reduced share count due to the buybacks till date. Magellan has spent $49.5 until now under its $200 million share repurchase program, authorized in October last year. Moreover, between Oct 26, 2012 and Dec 10, 2012, the company bought back about 0.34 million shares for $16.8 million. Shares outstanding as of Dec 10, 2012 were 27.4 million.

Magellan also disclosed that its operating and financial performance in 2012 has been satisfactory and the company received several new contracts during the year. Hence, it affirmed the 2012 guidance for segment profit at $240–$260 million, net income at $135–$155 million, and EPS at $4.83–$5.55. The Zacks Consensus Estimate for the company’s 2012 EPS is $4.53, lower than the company’s guidance range.

Magellan carries a Zacks #3 Rank (Hold). We maintain a long-term Neutral recommendation on the stock. Another healthcare service provider, Health Net, Inc. (HNT - Analyst Report) carries a Zacks #2 Rank (Buy).

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