Poor PacifiCare Earnings Trigger Sell-Off
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 of analysts’ expectations.
The dismal earnings projection triggered a massive sell-off of PacifiCare stock. The company’s two classes of common stock plummeted more than 21% to their lowest levels in two years, putting them among the stock market’s big losers Tuesday.
Santa Ana-based PacifiCare mostly blamed the lower earnings on the loss-ridden Utah business that the company took over earlier 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, saying it was a “mistake” and a “debacle” that has assured PacifiCare a place in Wall Street’s doghouse for another year, at least.
Alan Hoops, PacifiCare’s chief executive, admitted Tuesday that unpleasant surprises stemming from the acquisition have left the company “a little bit shellshocked.”
But 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 estimates of 69 cents. The earnings estimates exclude 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.
In last year’s fourth quarter, shortly before the FHP acquisition, the company posted earnings of $1 a share.
PacifiCare’s thinly traded “A” voting stock dropped $13.88 a share to $51.13 on the Nasdaq market. The company’s widely held, nonvoting “B” stock dropped $13.88 to $51.63 per share 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.
“I’m sure they had no idea that acquiring FHP would be this difficult and this much of a setback,” said Thomas Hodapp, an analyst at Robertson Stephens in San Francisco.
Analyst William McKeever said the FHP acquisition has been a “debacle” for PacifiCare. “We are getting the bad news in dribs and drabs, and I think we can continue to expect disappointments,” added McKeever, with Schroder Wertheim in New York.
He noted that the company continues to face problems in building its business in Washington and Oregon.
The company’s announcement raised eyebrows in the lending community.
Standard & Poor’s placed its ratings on the company’s bond and bank 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.
On top of that, the company faced enormous competition.
Hoops said the company’s experience in Utah resembles its earlier attempt to crack the Florida market years ago. The company bought two small health plans there, struggled against tough competition, then sold them off last year.
Earlier this year, the company also sold off former FHP holdings in Illinois and New Mexico, where it held limited market share.
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.”
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PacifiCare Problem
PacifiCare’s stock price fell more than 21% Tuesday when the company announced it expects to report a fourth-quarter loss. Monthly closing prices and Tuesday’s close:
Jan. $75.50
Tuesday’s close: $51.13
On the Block
PacifiCare has sold three divisions this year and has plans to sell a fourth, in Utah. Units jettisoned by PacifiCare:
Unit: Purchaser
* FHP of Illinois: Principal Health Care Inc.
* PacifiCare of Florida: Total of Florida Holdings Co. Inc.
* FHP of New Mexico: Presbyterian Health Plan
* PacifiCare of Utah: (looking for a buyer)
Sources: Bloomberg News; Times reports
