WellCare Fattens Up

The stock soars as guidance impresses.
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All looks swell at

WellCare

(WCG) - Get Report

.

Fourth-quarter results, driven by the company's booming Medicare business, easily topped Wall Street expectations on Tuesday. The company's increased 2006 guidance came as a pleasant surprise as well.

WellCare posted-fourth quarter revenue of $512 million, up 29% from a year ago and $11 million ahead of the consensus estimate. The company did see net income drop 39% to $10.8 million due to costs associated with new product launches. However, the company's operating profits of 54 cents a share -- up 22% from a year ago -- beat Wall Street expectations by 4 cents.

Looking ahead, WellCare now expects to generate 2006 profits of between $2.37 and $2.42 a share despite an unexpected delay in its Georgia expansion. Analysts, on average, were looking for full-year profits of just $2.31 instead.

"The strong performance of our core business in 2005 -- led by 50% growth in our Medicare membership -- provides an excellent foundation for our new Georgia and (Medicare) opportunities in 2006," WellCare CEO Todd Farha stated. "We have surpassed the million-member milestone, currently serving over 1.4 million members, including approximately 620,000 new members from the successful launch of our Medicare Part D plans across the country. We are pleased by the strong acceptance of our plan offerings among Medicare beneficiaries."

WellCare investors felt quite pleased as well. They sent the stock up 7% to $41.94 late Tuesday morning.

Mixed Views

Upon reviewing WellCare's latest results, SG Cowen analyst Edmund Kroll saw plenty to reinforce his bullish view of the company.

Besides topping revenue and profit estimates, Kroll noted, WellCare managed to end the year with even more customers than he had expected. The company's 620,000 Part D customers -- which exceeded Kroll's estimate by 70,000 -- certainly helped.

Kroll, whose firm counts WellCare as an investment-banking client, now sees the stock outperforming the broader market by "at least 20%" in 2006. He, therefore, recommends buying the shares now.

But Credit Suisse analyst Patrick Hojlo is more cautious. For one thing, he notes, WellCare actually weathered a sequential decline in memberships during the latest quarter -- missing his growth expectations for the first time since the company went public. He points to lower medical costs and higher investment income as the real reasons for the company's recent upside surprise.

Still, Hojlo clearly questions whether WellCare can continue to beat investors' lofty expectations going forward. Hojlo, whose firm seeks to do business with the companies it covers, currently has a neutral rating on WellCare's stock.

"Some argue a premium is warranted, given upside potential from Medicare and consistent Medicaid operations," Hojlo wrote on Tuesday. But "we still argue that the execution risk in growing the company's membership by 120%-plus between Georgia and Part D is too severe to justify even the stock's current valuation (only a 10% discount to its commercial brethren) unless you think numbers are going much higher.

"We don't."