OKLAHOMA CITY -- These days,
investors seem relieved by any prognosis that leaves the company alive.
Normally, fresh details about a massive government raid would hurt a company's stock. So would contract losses, like the
prominent one reported by
on Friday. But WellCare's stock actually rose following both of those setbacks.
This week, CIBC World Markets analyst Carl McDonald offered a possible explanation.
"We think WellCare's stock is undervalued, since the share price seems to discount an almost worst-case scenario that we think is unlikely to occur," McDonald wrote on Monday. "Said differently, we don't think the ongoing government investigation will put WellCare out of business -- and in virtually any scenario other than a complete eradication of the business, the company should be worth more than it trades for today."
One day later, McDonald emerged with an estimated value for the stock. Over the course of the next 12 to 18 months, he believes that shares could hit $60 -- about half of their pre-raid price. He upgraded the stock Tuesday to outperform as a result.
Quite simply, based on recent developments, McDonald believes that WellCare faces a limited investigation that might trigger a fine but will leave the company fully operational in the end.
WellCare shares recently were jumping 9.7% to $38.39 on that bullish call.
McDonald issued his new report following some possible breakthroughs in the case.
The Tampa Tribune
over the weekend offered up some fresh clues about the investigation, detailing a nine-page search warrant used for last month's raid and a 43-page index of items retrieved during that search.
reported that government officials sought information about WellCare's activities in at least nine states over the past five years, with a particular focus on possible overpayments to the company.
The article suggests that investigators walked off with some potentially damaging reports. Two with especially sensational titles -- "2007 Stairway to Heaven Plan" and "Analysis of Shorting Stock" -- came from the CFO's files. In addition, the newspaper said, a "letter to get around Medicaid requirements" and a copy of a $20,000 check to the "Puerto Rico patron saint festival" surfaced as well.
But CIBC's McDonald felt relieved nonetheless.
"In our view, the warrant appears to be fairly specific in nature and focused primarily on WellCare's Medicaid business in Florida, particularly its behavioral health operation," the analyst wrote on Tuesday. "Maybe we're reading too much into it, but we think it's meaningful that the government didn't mention any of the company's other operating entities," such as its lucrative Medicare organizations.
Still, others felt more wary. In a research note Monday, Deutsche Bank analyst Scott Fidel warned that the "probe could extend beyond Florida" and stuck with his hold recommendation on the company's stock. Bear Stearns analyst John Rex cautioned investors about a potentially widespread probe as well.
While government officials clearly sought information about WellCare's Medicaid unit, Rex stressed, they left with documents related to the company's entire operations.
"You name it, you'll probably find it mentioned in the more than 60-page inventory of items seized," Rex declared on Tuesday. "There is still some bias to Medicaid and anything to do with mental health, though the inventory is not as focused as the warrant would appear -- with plenty of items that would also pertain to Medicare and touching most of the company's operations and regions."
Like Fidel, Rex remains cautious on WellCare, with the equivalent of a hold recommendation on the company's stock. He has established no formal target price on the shares.
CIBC, Deutsche Bank and Bear Stearns all seek to do business with the companies they cover.
Before upgrading WellCare on Tuesday, McDonald had already slashed his expectations for the company. On Monday, he predicted that WellCare would post earnings of just $5.10 a share next year, down sharply from his previous $6.45 estimate and representing no year-over-year growth at all.
McDonald offered three reasons for that sizable hit. First, rather than his prior belief that WellCare would boost its Medicare Advantage enrollment by 50% next year, McDonald now expects that the company will lose thousands of those lucrative accounts instead.
Next, with a crowd of attorneys working full-time on WellCare's defense, McDonald suspects that legal bills will start piling up as well. And finally, given the serious distractions caused by the probe, he looks for the company's performance to suffer overall.
All told, McDonald believes that the investigation could drag on for at least a year, and pressure WellCare's stock all the while. Still, he senses a comeback in the end.
"We believe it will take a considerable amount of time for the government to complete its review of the documents taken, since the list of documents retrieved from the investigation is 77 pages long and the documents and equipment was substantial enough to fill a Ryder truck," McDonald wrote.
Moreover, "it's possible that the raid bleeds into other areas of the company's operations," he added. "But the specific focus of the search warrant seems to rule out widespread, systematic fraud -- which increases the likelihood that WellCare ultimately settles the investigation, pays a fine and goes on with all its businesses."