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Serial Acquirer WellCare Health Plans, Inc. (WCG) Set For Further Growth

Contract Extensions

In addition to its recent acquisitions, contract extensions play an important part in WellCare Health Plans, Inc. (NYSE:WCG)’s ability to maintain a strong existing pipeline.

One of largest parts of WellCare’s business is its Medicaid operations. Medicaid includes Medicaid Health Plans for beneficiaries of Temporary Assistance for Needy Families, Supplemental Security Income, Aged Blind and Disabled and other state-based programs that are not part of the Medicaid program, such as Children’s Health Insurance Program and Managed Long-Term Care programs, including long-term services and support.

WellCare’s Medicaid operations in certain states individually account for 10% or more of its consolidated premium revenue. These states are an important part of the company’s Medicaid premium revenue as a percentage of total consolidated premium revenue. These states include Kentucky, Florida and Georgia:

With this in mind, in late 2016 Georgia Department of Community Health announced its intention to exercise its option (through two six-month renewal terms) to extend WellCare’s current contract through to June 30, 2017. WellCare has entered a new contract with Georgia DCH and anticipates its services under the new contract will commence on July 1, 2017, with an initial one-year term and four additional one-year renewal options at Georgia DCH’s discretion. The new contract is subject to approval by CMS.

In May WellCare announced it had entered into a contract amendment with the Kentucky Department of Medicaid Services to renew its participation in the Kentucky Medicaid program through to December 31, 2016, and included one additional six-month or three additional one-year renewal periods upon mutual agreement.

WellCare is maintaining a solid track record of contract extensions with other contract renewals in 2016 including:

– The October announcement that WellCare received a Notice of Award from the Missouri Office of Administration to continue to participate in the MO HealthNet Managed Care (Medicaid) program. Services under the new contract are expected to begin on May 1, 2017, with an initial one-year term and four additional one-year renewal options. As of September 30, 2016, WellCare served approximately 117,000 Medicaid members in Missouri

– The March announcement that the New York State Department of Health had extended WellCare’s contract to continue providing managed care services for children as part of its Child Health Plus program in 16 counties. The extension runs through September 2019 and does not require annual renewals

– The April announcement that Nebraska Department of Administrative Services had selected WellCare to participate in the state’s Medicaid Managed Care program, Heritage Health. Services under the contract are scheduled to commence on January 1, 2017, with an initial five-year term and two additional one-year renewal options at the discretion of Nebraska DAS

This ability to maintain its strong existing pipeline together with its recent acquisitions is what puts Wellcare in a solid position for growth.

Let’s Run The Numbers

In order for WellCare to continue with its growth through acquisition strategy it’s important that the company is financially robust. With that being said, WellCare continues to maintain a strong balance sheet.

A quick look at the company’s latest Q3 2016 balance sheet below shows that WellCare has $4.08 billion in cash and cash equivalents and total debt of $997 million as of September 30, 2016. If we subtract the total debt from the cash and cash equivalents that leaves $3.084 billion in net cash over debt. With the company’s current market cap of $6.05 billion, when we subtract net cash from the current market cap that leaves WellCare with an Enterprise Value of $2.96 billion.

Quarterly Balance Sheet (Amounts in 000’s)
Quarter: 3rd 2nd 1st 4th
Quarter Ending: 9/30/2016 6/30/2016 3/31/2016 12/31/2015
Cash and Cash Equivalents $4,081,600 $2,726,600 $2,586,200 $2,603,000
Short-Term Debt / Current Portion of Long-Term Debt $0 $0 $0 $300,000
Long-Term Debt $997,400 $1,097,200 $1,097,100 $1,212,100

(Source: Company reports, sec.gov)

Growing Revenues and Net Income

WellCare continues to grow its revenues, net income, and margins.

If we take a quick look at the company’s quarterly income statements below for the trailing twelve months we can see that total revenues grew to $3.58 billion in Q3 2016, up 5% from $3.44 billion in Q3 2015, while net income also increased to $69 million, up 91% from $36 million in Q3 2015.

WellCare is also maintaining healthy gross margins around 15% and its operating margins have improved to around 5%.

Quarterly Income Statement (Amounts in 000’s)
Quarter: 3rd 2nd 1st 4th
Quarter Ending: 9/30/2016 6/30/2016 3/31/2016 12/31/2015
Total Revenue $3,584,000 $3,594,400 $3,540,500 $3,496,800
Cost of Revenue $3,040,200 $2,988,900 $3,061,900 $3,001,800
Gross Profit $543,800 $605,500 $478,600 $495,000
Sales, General and Admin. $268,500 $278,000 $268,900 $340,900
Other Operating Items $107,800 $106,200 $105,000 $104,100
Operating Income $152,900 $206,700 $88,900 $36,300
Add’l income/expense items $0 $0 $0 $1,500
Earnings Before Interest and Tax $167,500 $221,300 $104,700 $51,500
Interest Expense $14,600 $14,600 $15,800 $15,200
Earnings Before Tax $152,900 $206,700 $88,900 $36,300
Income Tax $84,300 $115,200 $51,800 $23,300
Net Income $68,600 $91,500 $37,100 $13,000

(Source: Company reports, sec.gov)