Foundation Shares Fall on Earnings Concerns
Shares of Foundation Health Systems Inc. fell 15% amid investor concern that the managed-care company’s earnings outlook is worse than it has indicated.
Woodland Hills-based Foundation’s shares fell $2.38 to close at $13.88 on the New York Stock Exchange. Earlier, the shares reached $12.38, a four-year low.
Foundation, one of California’s largest health insurers, warned last week that trouble with its Medicare operations will hurt earnings, causing analysts to downgrade their full-year earnings estimates. Investors have been skittish about HMO stocks since United HealthCare Corp., considered one of the strongest HMOs, stunned the market two weeks ago in reporting a $565-million second-quarter loss.
“We’re going through a rough patch here, and clearly there is a lot of blood in the water,” said William Jacobs, an analyst with Harris Associates. “It’s a hated industry. You’ve got misinformation, and you may have shorts spreading rumors.”
“Shorts” refers to short sellers, who borrow shares of a stock and sell them on the expectation the price will fall and they’ll be able to profit by buying them back cheaper.
Foundation issued a statement saying it is aware of no corporate developments that would account for the plunge in its shares. It did so at the request of the NYSE.
“It appears we’re under pressure from short sellers,” said company spokesman David Olson. “I have no explanation for it.”
Foundation last week reported that profit, before a charge, fell to $31.3 million, or 26 cents a diluted share, from $54.8 million, or 43 cents, a year earlier.
Earnings were hurt by larger-than-expected medical cost increases at its Medicare plans in the Northeast, the company said.
“There are no problems in the Northeast other than the problems with Medicare that we have already disclosed,” Olson said.
Jacobs said he’s wary about whether Foundation can carry through with the sale of its workers’ compensation unit to Superior National Insurance Group.
Foundation is selling the unit as it moves to focus on its main HMO business.
