PacifiCare Earnings Projections Halved
PacifiCare Health Systems Inc., still reeling from its acquisition of a major competitor, jolted investors once again Tuesday by announcing that the managed-care company’s fourth-quarter earnings will be about half what analysts had expected.
The dismal earnings projection triggered a massive sell-off of PacifiCare stock. Prices of the company’s two classes of shares plummeted more than 21% to their lowest levels in two years, putting them among the stock market’s big losers Tuesday.
The Santa Ana-based company mostly blamed the lower earnings on the loss-ridden Utah business it took over this year as part of its acquisition of Orange County rival FHP International Corp. PacifiCare said it plans to sell the Utah unit.
After the announcement, analysts denounced the FHP acquisition, calling it a “debacle” that has assured PacifiCare a place in Wall Street’s doghouse for another year at least.
Alan Hoops, PacifiCare’s chief executive, said Tuesday that unpleasant surprises stemming from the acquisition have left the company “a little bit shellshocked.”
Nevertheless, he defended the deal. “I still believe that the combination of FHP and PacifiCare was the right thing to do,” he said.
The company said operating earnings for the quarter ending Dec. 31 will run about 30 to 40 cents a share, far short of analysts’ average estimate of 69 cents. The estimate excludes charges of $2.25 to $2.80 a share that PacifiCare is taking for restructuring and writing down goodwill associated with purchase of the Utah operations and other former FHP units.
Shares of PacifiCare’s thinly traded voting Class A stock dropped $13.88 a share to close at $51.13 on the Nasdaq market. Its widely held, nonvoting Class B stock dropped $13.88 to close at $51.63 in heavy trading. A total of 4.6 million of the Class B shares changed hands, more than seven times the average daily volume for the last three months.
The company’s announcement raised eyebrows in the lending community.
Standard & Poor’s said it placed its ratings on the company’s loans on its list of issues being watched for a possible downgrade.
The company estimates it will lose $40 million to $50 million in Utah alone this year. Clearly, the losses have made the state--the company’s fourth-largest market, with only 186,000 members--more trouble than it’s worth.
As is common in health-care industry acquisitions, much of the Utah problem results from botched attempts to meld PacifiCare’s business systems with those it acquired from FHP. The company said its attempts to convert processing of Utah members’ claims for health-care services to PacifiCare’s system led to huge backlogs.
At the same time, management lost touch with sharply increasing health-care costs there. By the time the company got caught up on claims processing, it discovered that costs had skyrocketed.
Still, PacifiCare has its defenders on Wall Street. Until the FHP purchase, the company was held in high regard for its performance and for delivering on its promises.
With PacifiCare stock off sharply, Prudential Securities on Tuesday upped its investment recommendation to a “buy” from “hold.”
