Magellan Health, Inc. (MGLN - Free Report) seems to have fallen out of favor with investors on concerns surrounding the company owing to its subdued profitability and stiff competition limiting revenues.
During fourth quarter results, the company reported an operating loss of 77 cents per share missing the Zacks Consensus Estimate of $1.42 per share. In the year ago quarter, the company reported earnings of $2.55 per share.
Revenues of $1.84 billion also missed the Zacks Consensus Estimate of $1.89 billion.
Segment profit of $16 million declined 84% year over year, as it was negatively impacted by $50 million of period and non-recurring items.
The stock has probably also bore the brunt of weak earnings performance, having missed estimates in three of the four trailing quarters.
The stock has witnessed a downward revision in 2019 and 2020 earnings estimate by 5% and 7.8% respectively, over the past 30 days.
Shares of the company have declined 40% in a year’s time against the iindustry’s growth of 7.8%.
Factors Affecting the Stock
Sluggish Top-line Growth: The company has witnessed a steady top-line improvement over the past several years, which is evident from its six-year CAGR of 14.7% (2012-2018). However, the company anticipates total revenues to be in the band of $7.2-$7.5 billion for 2019, which reflects year-over-year growth of 0.5% (calculated at the mid-point). This year-over-year decline in revenues can be attributed to challenges in the company’s Complete Care business and stiff competition in the Pharmacy Benefit Management business.
Pharmacy Management Earnings Under Pressure: This segment’s profit declined 25% year over year in 2018, owing to a decrease in earnings at the segment’s specialty carve-out business, resulting from lost formulary management contracts. Owing to contract terminations and aggressive pricing in the segment, the company expects revenues to be lower in 2019, which is likely to limit overall revenues.
Decline in Segment Profit: Segment profit, a non-GAAP measure used by the company to measure its operating profitability, was down by 27% in 2018. This can be attributed to decline in income and increase in expense.
Profitability: The company’s return on equity (ROE) undermines its growth potential. It has trailing 12-month ROE of 4.6% comparing with the industry average of 22.35%, indicating that it is less efficient in using shareholders’ funds.
Given the headwinds plaguing the company, we don’t anticipate the stock to witness any respite soon. The stock carries a Zacks Rank #5 (Strong Sell).
Some better ranked stocks in the same space are UnitedHealth Group Inc. (UNH - Free Report) , Centene Corp. (CNC - Free Report) and Molina Healthcare, Inc. (MOH - Free Report) .
Each of these stocks has a Zacks Rank #2 (Buy) and surpassed estimates in the trailing four quarters with average positive surprise of 3.4%, 5.1% and 109%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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