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WellCare's (WCG) Inorganic Efforts to Fuel Long-Term Growth

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On Jan 16, 2017, we initiated a research report on WellCare Health Plans, Inc. .

The shares of WellCare have appreciated 102.1% compared with Zacks categorized Health Maintenance Organization (HMO) industry’s gain of 30.8% over the last one year. This outperformance has been driven by the company’s solid revenue growth as well as financial strength and reflects shareholders’ confidence on the stock.

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The Florida-based company primarily focuses on providing government-sponsored managed care services. The insurer has witnessed consistent growth in the top line. In fact, its revenues have increased at a four-year CAGR of 22.5% since 2011. At the end of first nine months of 2016, revenues increased 2.3% over year-end 2015. The robust revenue growth has been mainly been driven by the company’s accretive acquisitions over last three years. In Nov 2016, WellCare announced its plan to take over another insurance behemoth, Universal American Corp. . Addition of Universal American is expected to enhance the growth potential of WellCare.

WellCare’s financial strength has enabled it to undertake acquisitions. Also, its liquidity grew by more than 100% at the end of first nine months of 2016. In addition, WellCare’s solid cash position has facilitated it to take up several shareholder-friendly through capital deployment initiatives like dividend payments, and share buybacks.

However, Wellcare Health has been suffering from high debt level and rising expenses. Despite sufficient liquidity, the company has funded many of its acquisitions through debt financing strategies, which led to a rise in total debt and interest expenses. For the full year, management expects interest expenses in the range of $59­–$60 million, significantly higher than 2015.

The company’s rising benefit expenses and operating costs indicate its poor cost management. In the third quarter of 2016, adjusted SG&A expense grew 1.1% from third quarter of 2015. Stiff competition, stringent regulations in its areas of operations and geo-political issues are other headwinds.

Zacks Rank and Stocks to Consider:

WellCare presently has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Other well-ranked medical sector stocks include Magellan Health Inc. and UnitedHealth Group Inc. (UNH - Free Report)

Magellan delivered positive surprise in three of the last four quarters with an average beat of 42.58%. It sports a Zacks Rank #1.

UnitedHealth carries a Zacks Rank #2 (Buy). The company delivered positive surprises in all the last four quarters with an average beat of 3.86%.

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