Amerigroup Tries to Regroup

Diversified managed care players remain healthy investments despite the woes of their Medicaid-only peers.

That's the view offered by Wall Street analysts, anyway, after Amerigroup (AGP Quote) this week issued a profit warning that sent its stock plummeting by more than 40%.

For investors in Amerigroup -- and even competing Medicaid insurers such as Centene (CNC Quote) and Molina (MOH Quote) -- the news couldn't get much worse. Amerigroup now expects to report a third-quarter loss instead of the 48-cent profit that analysts had anticipated. Much of the shortfall stems from a spike in care for sick newborns and those seeking outpatient services. But more than half of it comes from medical costs that wound up underreported in the first half of the year.

Thus, Amerigroup earned even less than Wall Street expected when the company posted disappointing quarterly results last time around. By now, some believe, management has suffered lasting damage as a result.

"The company was the first Medicaid-focused managed care organization to go public and -- with a three-year track record of solid financial performance while navigating challenging regulatory environments -- Amerigroup was viewed broadly as an industry leader," noted Lehman Brothers analyst Gregory Nersessian on Friday. But "following two consecutive earnings shortfalls, evidence of reserve mismanagement and the communication of mixed signals to investors at recent industry events, we believe that investors will be less likely to give management the benefit of the doubt going forward."

Nersessian himself has clearly lost faith. He cut his recommendation on the stock from overweight to equal-weight and his price target by virtually half to $21.

The stock, down another 4% on Friday's downgrade, recently fetched $18.97.

Immune System

Still, analysts see no similar problems for more traditional managed care players -- even those, such as Humana (HUM Quote), with big Medicaid units of their own. Indeed, they suggested buying selected names on any weakness in the broader group.