Cigna’s Slowing Growth Alarms HMO Investors
Two of the nation’s biggest managed-care companies Wednesday posted higher quarterly profits, but disturbing growth signals by one of them, Cigna Corp., sent it and other HMO shares reeling.
Humana Inc., which serves about 5.3 million members in 15 states and Puerto Rico, said that its revenue in the first quarter slipped because of a strategy to cut membership, but that net income rose 29% because of reduced exposure to unprofitable markets.
Investors were alarmed by Cigna’s accelerating medical cost trends and slowing membership enrollment even more than by the No. 3 U.S. health maintenance organization’s lowered guidance for second-quarter and annual earnings, and they projected those concerns onto the entire HMO sector, analysts said.
“It is those trends that are bothering people,” said David Shove, an analyst at Prudential Securities. “The [premium] pricing trends and [medical] cost trends have spooked investors.”
Cigna shares, which have under-performed the Standard & Poor’s index of managed-care stocks by about 6% over the last year, fell $15.85, or 15%, to close at $92.85 on the New York Stock Exchange.
Cigna, which provides health, group life, accident and disability insurance as well as retirement services, reported first-quarter net income of $276 million, or $1.78 a share, up from $271 million, or $1.60, a year earlier. The results fell within First Call/Thomson Financial analysts’ forecasts of $1.71 to $1.86 per share. Revenue fell 4% to $4.7 billion.
Cigna said during a conference call that it expects earnings per share for the second quarter and the year to fall below its prior guidance and far below analysts’ estimates, mostly because of “stock market impact” on its retirement business.
At Louisville, Ky.-based Humana, earnings rose to $27 million, or 16 cents a share, meeting the consensus Wall Street earnings forecast. In the year-ago period, Humana reported earnings of $21 million, or 13 cents a share. Revenue dropped 8% to $2.44 billion.
Shares of Humana fell 14 cents to close at $9.91 on the NYSE.
At a Glance
Other earnings, excluding one-time gains and charges unless noted:
* AutoNation Inc., the largest U.S. automobile retailer, said first-quarter earnings fell 7.4% because consumers bought fewer cars and light trucks. Net income fell to $59.9 million, or 17 cents a share, from profit from continuing operations of $64.7 million, or 18 cents, a year earlier. Sales declined 6.6% to $4.89 billion.
* CVS Corp.’s first-quarter profit rose 16% after the second-largest U.S. drugstore chain sold more prescription drugs. Net income rose to $221.7 million, or 54 cents a share, from $191.3 million, or 47 cents, a year earlier. Sales increased 14% to $5.39 billion. The biggest boost came from an 18% rise in same-store sales at its pharmacies, which the company has been expanding to meet demand from an aging U.S. population and the growth of managed health care. Second-quarter profit will be less than analysts’ forecasts, partly because of costs to introduce a frequent-buyer card and a slower flu season that hurt sales.
* Equity Residential Properties Trust, the largest U.S. apartment owner, said first-quarter earnings rose 13%, led by rent increases in California and the Northeast. The Chicago-based real estate investment trust posted profit from operations of $192.2 million, or $1.30 a share, up from $169.9 million, or $1.19, a year earlier. Revenue rose 12% to $537.9 million.
* Martha Stewart Living Omnimedia Inc., a multimedia company built around its founder’s homemaking tips, said first-quarter profit rose 11% as merchandising sales increased. Net income rose to $6.2 million, or 13 cents a share, from $5.6 million, or 11 cents, a year earlier, the company said. That beat the 11-cent average estimate of analysts. Revenue rose 3% to $71.2 million.
* Wendy’s International Inc.’s first-quarter profit rose 7.7%, meeting reduced estimates, as new menu items at Tim Hortons coffee shops in Canada and the U.S. helped boost sales. Net income at the third-largest U.S. hamburger chain rose to $38.7 million, or 33 cents a share, from $35.9 million, or 30 cents, a year earlier. Sales rose 7.1% to $555.5 million.
* Reader’s Digest Assn. Inc. said that fiscal third-quarter earnings rose after it cut expenses and that profit for the quarter will miss estimates. The publisher and direct marketer of magazines, books, videos and records also said it plans to buy back up to $250 million of its stock. Net income for the quarter ended March 31 rose to $27.9 million, or 27 cents a share, from profit from operations of $18.3 million, or 17 cents, in the year-earlier quarter. Sales fell 2% to $607.7 million, hurt by a 17% decline in advertising sales.
