Metropolitan Health Networks: Early bird special
Health-care provider Metropolitan Health Networks, Inc. (AMEX:MDF) is plotting its way through the land of crocs and palms, finishing a Disney-like 2007 with similar prospects for 2008. Signing Floridians to its health plans is turning into paradise for the company, despite a health-care industry designed by Goofy.
Metropolitan Health Networks (MetCare) is tiny, yes, with market capitalization of just $107 million. It relies on Medicare money, flimsy as tiffany; Congress is considering cutbacks and, oh, what if the Democrats win in November? It is building its Health Maintenance Organization, and there’s not much to like about an HMO, with its soaring premiums and restrictions. Even as they raise costs, health providers operate on margins so thin they can slice profits at the slightest slip: costs must be held to a minimum (think service) and companies must vigilantly monitor (think influence) shifting regulations.
Doesn’t sound like the stuff of a profitable Tomorrowland. But then there’s MetCare, founded in 1996 and headquartered in West Palm Beach. MetCare runs two main businesses in Florida: a provider service network (PSN) that arranges for medical care primarily to customers of Humana, Inc. (NYSE:HUM), and an HMO, which provides health-care benefits to Medicare beneficiaries in Florida who have selected its plan.
At the end of fiscal 2007 on Dec. 31, Metcare’s PSN provided health-care benefits to 25,400 people, and its Medicare Advantage HMO to 6,200 beneficiaries. Here’s where investors get as squeamish as a claustrophobe on Space Mountain: both the company’s PSN and HMO operations focus on individuals covered by Medicare, the national, federally administered health insurance program. That’s 33,000 people and substantially all of MetCare’s revenues flapping in the Medicare breeze.
But MetCare’s revenue growth is worthy of salute. In fiscal 2007, it took in $277.6 million, up 22% from 2006. Medical expenses for 2007 were $240.1 million, an increase of 17%, but the critical ratio of medical expense to revenue decreased to 87%, compared to 90% in 2006. Earnings per diluted share were $0.11, up from a penny.
Fourth-quarter results carried more good cheer, with revenues growing 25% to $69.9 million and earnings of $0.05 per share, compared with a loss of a nickel in the fourth quarter last year.
Citing fourth-quarter strength, Robert Wasserman, an analyst at Jesup and Lamont, raised his 2008 revenue estimate to $331.7 million, up 20% from 2007. In an early March research note, he also raised his earnings forecast to $0.20 — nearly double 2007’s earnings — from his previous $0.15, and sees a modest decline in the medical expense ratio.
Wasserman’s estimates assume 7,500 HMO members by April 1 and 8,500 by the end of the year, “counting on new sign-ups either in the summer new beneficiary sign-up period or the winter open enrollment period, or possibly a small acquisition this year, similar to several transactions made in 2007.”
The company’s goal — not necessarily this year — is to hit the 10,000 membership mark, a breakeven objective. CEO Michael Early said on the quarterly conference call that that level will mean more stability in terms of medical expense exposure and will poise the business to stand on its own two feet. The up-and-coming HMO generated 20% of sales in 2007, up from 12% the previous year. Still unprofitable but growing since its mid-2005 introduction, the Advantage Care HMO plan now operates in 12 counties.
For the core PSN business, Wasserman assumes a 10% increase in revenues for 2008, split evenly between rate increases and new business initiatives, such as the expansion in the Daytona market or growth in the new Humana CarePlus business. Management has estimated rate increases of 5% to 6% on average for 2008. MetCare’s PSN business provided 80% of company revenues in 2007.
MetCare’s balance sheet is strong enough to acquire a small Florida provider. It has unrestricted cash of $25 million and no long-term debt. The company has made it clear it intends to invest in growing its business, rather than use cash to buy back shares or for anything else.
Valuation is compelling. MetCare shares ended Wednesday at $2.06 each, near the middle of the 52-week range of $1.62 to $2.60. That’s only 11 times Wasserman’s 2008 earnings estimate of $0.20. Wasserman — the only analyst listed as covering MetCare — maintains a “buy” rating and a 12- to 18-month target of $3 to $3.50. He notes that his price range is 15 to 17 times his forward earnings estimate and still below expected revenue growth of 20%.
“A strong balance sheet, positive annual earnings comparisons, continuing favorable demographics and some recent new growth initiatives give MetCare very attractive growth/value attributes,” Wasserman says.
But there is that shaggy dog of concentrated revenue. About all of it — one way or another — comes from Medicare and about 80% comes from Humana, which is dependent on the government for its own reimbursement. Wasserman notes, too, that the Advantage Care HMO venture could remain unprofitable through 2008.
White hot in an ice-cold industry. Hey, it’s a Jungle Cruise out there.
About the Author
Contributing author Jennifer Allen has two decades of experience as a writer and editor, mainly as a financial wire service correspondent.
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