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.
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.