Wall Street gave PacifiCare Health Systems Inc. a big dose of bad medicine Tuesday, knocking down the stock 21% after the managed health-care company said it would post “substantially lower” financial results for the second quarter.
Analysts said that fierce competition among health maintenance organizations in California has limited profits industrywide, but PacifiCare’s disappointing results stem largely from weaknesses in FHP International Inc., the beleaguered company PacifiCare bought early this year.
PacifiCare also contributed to the stock’s huge drop, analysts said, by failing to explain more fully why revenue and earnings would be lower than Wall Street’s estimates.
“Uncertainty wreaks havoc on a stock, and that’s what happened today,” said analyst Eleanor H. Kerns of Alex. Brown investment banking firm.
The company said it expects to provide details later this week.
PacifiCare, the nation’s fifth-largest managed care company, released a cryptic statement about lower results after the market closed Monday.
It said only that the reasons included “substantially lower performance in a number of FHP markets and disappointing results in California for the month of May.” When the market opened Tuesday, Wall Street hammered both classes of PacifiCare’s common stock in trading that was more than 10 times the daily average for the last three months.
The company’s class A voting stock plummeted $17.25 a share to close at $63.75 while its class B nonvoting stock sank $18.75 a share to close at $66.75 on the Nasdaq market system.
PacifiCare’s class A stock lost $255.3 million in market value, while the class B stock lost $577.5 million.
Traders “assume the worst, and we understand that,” PacifiCare spokesman Ben Singer said. “The reason for the delay in providing details is so we can get our hands around the financial issues, like how deep is deep?”
Singer said the company should still be profitable, but projections for the quarter and the year are being revised downward.
Analysts had expected the company to earn $1.16 a share for the second three-month period and $4.84 a share for the year. On Tuesday, many of them dropped their annual estimates by 55 to 85 cents and downgraded their recommendations from “buys” to “holds.”
“Clearly, things are worse than anticipated at FHP,” said Peter H. Costa, an analyst in the Boston office of ABN AMRO Chicago Corp. “I’m not sure whether you can fault PacifiCare management for overly optimistic expectations for turning FHP around, or for not getting what they expected.”
One source familiar with PacifiCare’s efforts to integrate FHP operations said PacifiCare found incomplete or inadequate records.
Singer wouldn’t comment directly on the state of FHP records, saying only that there are “some concerns” about the integration of the two companies.
“Part of the review taking place should tell us whether we were overly optimistic or whether we didn’t know about some problems,” he said. “We’re digging down into the details and looking to put together concise figures.”
The purchase of FHP was supposed to close late last year, but it dragged on until early this year, putting PacifiCare further behind in getting new business this year, analysts said. Companies typically offer employees a chance to change health-care providers only at the end of the year, though some end their fiscal year in mid-summer.
“PacifiCare missed the window of opportunity this year and will have to wait until early 1998 before they see a real recovery,” analyst Costa said. “The companies needed to be together in the summer to pitch their plans effectively for the next year.”
PacifiCare not only has missed its opportunity this year, it has seen a “leakage” in FHP membership in California and other states, said Thomas E. Hodapp, an analyst at Robertson, Stephens & Co. in San Francisco. The company already has announced sales of FHP plans in Illinois and New Mexico, where FHP had lagged in market share.
Analysts gave PacifiCare mixed reviews in consolidating previous, smaller purchases. Singer acknowledged that it has had an easier time folding in California companies it has bought than integrating out-of-state acquisitions.
FHP, though, is the biggest purchase, doubling PacifiCare’s revenue and turning a five-state operation into a 14-state business.
The analysts had high praise generally for PacifiCare management, agreeing that it should be able to weather the FHP problems.
“I think this is a franchise company,” Hodapp said. “This management team has done a number of acquisitions over time that have worked out well, though rapid integration of their acquisitions has never been their strong suit.”
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PacifiCare’s stock fell 21% to $63.75 on news that its second-quarter earnings would not meet analysts’ expectations. Closing prices for the past 10 trading days, including Tuesday:
Source: Bloomberg News