PacifiCare Profit Doubles for 2nd Quarter
PacifiCare Health Systems Inc. said second-quarter profit more than doubled, beating forecasts, as one of California’s largest health insurers began to get a handle on rising medical costs.
However, PacifiCare’s stock fell 4.7% as investors questioned a decline in the money the company has set aside to pay medical claims and other benefits. The reserve amount was enough to cover 30 days, down from 32 days in the first quarter.
“You never like to see the reserve days decline, especially when it’s a continuing trend,” said Peter Costa, an analyst at ABN Amro Inc. “It makes you question the quality of the earnings.”
After rising earlier in the day, PacifiCare shares fell $3.44 to $69.13 on volume of 1.25 million, more than double the three-month daily average.
Health care stocks have taken a drubbing after two of the biggest providers, FPA Medical Management Inc. and the nonprofit Allegheny Health Education & Research Foundation, sought bankruptcy protection last month.
“Things are being taken to extremes at this point, so stocks will overreact to marginal information,” said Kevin Holt, an analyst with Strong Capital Management, which holds shares in three of PacifiCare’s competitors.
Santa Ana-based PacifiCare reported second-quarter net income of $48.8 million, or $1.06 a share, up from $18 million, or 37 cents, a year earlier. The earnings beat analysts’ estimate of 92 cents in a poll by First Call Corp.
PacifiCare Chief Executive and President Alan Hoops said he was surprised by the market’s reaction to the quarter’s results.
“I believe this quarter’s earnings are quite high,” he said. “We anticipate continuing our improved results through the end of the year.”
Hoops said he expects the company will report 1998 earnings of at least $4 a share, beating the $3.80 consensus of analysts polled by First Call. He declined to comment on prospects for 1999, saying the company is in the middle of planning for next year.
PacifiCare reported the improved earnings after struggling with last year’s $2.2-billion acquisition of FHP International Corp., whose money-losing Utah operations turned out to be in worse shape than originally thought. PacifiCare has announced plans to sell that unit as it moves to complete integrating FHP.
“People forgot that eventually you get to the good times in these acquisitions,” said Greg Crawford, an analyst with Fox-Pitt, Kelton Inc. “Now you’re starting to see the synergies of the deal.”
The company, which is the top operator of Medicare health-maintenance organization plans, has held down costs in commercial medical plans by increasing the number of contracts that pay doctors a flat fee per patient rather than a fee for each procedure.
PacifiCare’s overall medical-loss ratio, which measures the percentage of premium revenue spent on medical costs, fell to 85.1% from 86.5% a year earlier.
PacifiCare membership fell 4.7% to 3.66 million from 3.84 million.
For the first six months, the company earned $90 million, or $1.96, up 47.5% from $61 million, or $1.44 a share, a year ago. Revenue increased 14% to $4.8 billion from to $4.2 billion.
