Two managed care players were bleeding on Monday.

First Health ( FHCC) slid deep into the red, dropping 13% to $18.84, after the company warned of weak first-quarter results. Meanwhile, Humana ( HUM) took a pounding of its own, falling 8.6% to $17.37 after meeting first-quarter earnings expectations but lowering guidance.

First Health blamed growing competition across its most lucrative business lines for a major shortfall in profits. In contrast, Humana portrayed its own performance as solid -- and even pledged to meet full-year expectations, despite its reduced outlook for the second quarter.

"Our results this quarter represent continued progress across a number of key operational fronts," said Humana CEO Michael McCallister. "We continue to expect 2004 revenue, earnings and cash flows to be the highest in Humana's history as a health benefits company."

Wall Street was hardly impressed. Indeed, one analyst pounced on the opportunity to reiterate his warnings about the sector. Matthew Borsch of Goldman Sachs downgraded the entire industry in January -- and First Health even earlier -- over concerns about pricing pressures that he believes could finally pinch the sector's healthy margins.

"We again highlight the risk of deterioration in the pricing environment as many of the nonprofit Blues appear to be at excessive levels of profitability and capitalization, and several have publicly announced steps through pricing and rebates to moderate their profits and/or capital levels," Borsch wrote on Monday. "With the nonprofit Blues in control of one-third of the industry enrollment and No. 1 market share in 35 states, we see their pricing actions on 2004 renewals as likely headwind for both fundamentals and sentiment for ... managed care stocks."

Borsch has a neutral rating on the sector and an even lower underperform recommendation on the two managed care players that disappointed investors on Monday.

Sugar-Free

First Health didn't bother to sugarcoat its bitter warning.

Instead, the company simply admitted that new revenue and profit estimates "for all quarters in 2004 are lower than previous expectations." Specifically, the company expects to report first-quarter revenue of between $215 million and $220 million, falling short of the consensus estimate of $234 million. Projections for full-year revenue of $885 million to $905 million also fall below analyst expectations of $953 million.

The company expects to miss profit targets as well. It forecasts first-quarter earnings of 30 to 32 cents, well below the consensus estimate of 38 cents a share. And it expects to deliver full-year profits of $1.30 to $1.40 a share instead of the $1.57 analysts were anticipating.

First Health explained on Monday that it had overestimated the performance of several key businesses, most notably in the lucrative commercial market, when it last issued guidance. The company already slashed its forecast in November -- and Borsch, at least, believes that management could still take a knife to its guidance again.

"We believe FHCC stock will continue to underperform the group, given the lack of significant positive catalysts and the substantial risk that FHCC management will need to further reduce the 2004 outlook," Borsch explained. "We believe that competitive pressures on FHCC's business will continue to intensify and is likely to lead to a disappointing 2005 outlook" as well.

Knife Wounds

Borsch also sounded fresh warnings about Humana on Monday.

He acknowledged that the company's first-quarter operating profits of 41 cents a share -- up 32% from a year ago -- matched the consensus. But he also noted that management expects profits to drop. The company is now projecting second-quarter profits of 37 cents to 39 cents a share instead of the 41 cents analysts were expecting. It will then need earnings to stabilize, and even grow, in order to meet full-year guidance of $1.60 to $1.65 a share and match the consensus estimate of $1.62 a share.

At least one analyst has already expressed some skepticism, however.

The "back-end loading and second-quarter EPS drop raise questions," noted Smith Barney analyst Charles Boorady, who has a sell recommendation on Humana's stock.

Borsch has also indicated that Humana may be aiming too high. He specifically questions the company's ability to hit aggressive enrollment targets following lackluster industry growth -- and even outright declines -- in new commercial customers over the past couple of years. He does concede that Humana's newer products, particularly "consumer-driven health plans," could drive growth in the future. But he believes improvement will still take time.

"We believe these products represent the future of commercial health insurance and think Humana will benefit significantly from its forward-looking investment," Borsch wrote. "However, we believe adoption rates will remain relatively low until 2006 at the earliest."

In the meantime, Borsch favors large-cap competitors -- such as Aetna ( AET) and UnitedHealth ( UNH) -- that may be better positioned to grow in the current competitive environment. Both of the big-cap names slid modestly on Monday. Aetna was down 50 cents to $89.86, while UnitedHealth fell 15 cents to $65.80.

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