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

One of the cheapest stocks in our Large Cap 1000 – Deep Value Stock Screener is, WellCare Health Plans, Inc. (NYSE:WCG).

WellCare Health Plans, Inc. (WellCare) focuses exclusively on government-sponsored managed care services, primarily through Medicaid, Medicare Advantage and Medicare Prescription Drug Plans to families, children, seniors and individuals with complex medical needs.

As of September 30, 2016, the company served approximately 3.8 million members. In the nine months ending September 30, 2016, WellCare operated Medicaid health plans in Florida, Georgia, Hawaii, Illinois, Kentucky, Missouri, New Jersey, New York and South Carolina. At the same time WellCare operated MA coordinated care plans in Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Illinois, Kentucky, Louisiana, Mississippi, New Jersey, New York, South Carolina, Tennessee and Texas, as well as stand-alone Medicare prescription drug plans in all 50 states and the District of Columbia.

If we take a look at the company’s share price history (below) over the past twelve months we can see that the stock has risen 75%, from $78.12 on January 5, 2016 to $136.63, just 3.6% off its 52 week high of $141.88 in December 2016.

(Source, Google Finance)

While the company’s share price has risen 75% over the past twelve months I believe the company still has more growth to come.

Growth Through Acquisition

There’s no question that WellCare has had a twelve months. Looking at its latest quarterly results, Q3 2016, the company had revenue of $3.58 billion, up 5% from $3.44 billion in Q3 2015, while net income increased 91% to $69 million from $36 million in Q3 2015.

Where I see continued growth is in the company’s acquisitions of Phoenix Health Plan, Universal American, Care1st and Advicare Corp together with its solid track record of contract renewals. WellCare is a company that generates significant amounts of free cash-flow which means it can search and pay for accretive acquisitions that will help to grow its business. The company also has a significant amount of cash on its balance sheet and relatively low debt.

Recent Acquisitions

In terms of its recent acquisitions:

– This month WellCare announced the completed acquisition of Care1st Health Plan of Arizona. The $157.5 million deal marks WellCare’s entrance into the Arizona Medicaid managed-care market. Care1st Arizona was a subsidiary of Care1st Health Plan, a California-based insurer that Blue Shield of California bought for $1.25 billion last October. Care1st Arizona provides Medicaid coverage to 112,000 people in the state’s two largest counties and also has a small Medicare Advantage special needs plan that covers 2,000 people. Projections indicate Care1st Arizona is expected to add about $400 million of premium revenue to WellCare.

– In December, WellCare announced that had signed a definitive agreement to acquire certain assets, including Medicaid membership and certain provider contracts, from Phoenix Health Plan (PHP), a wholly owned managed care subsidiary of Tenet Healthcare. PHP provides health benefits primarily to more than 50,000 Medicaid beneficiaries as of December 1, 2016 in Maricopa County, Arizona, the state’s largest geographic service area. The transaction is expected to close by the second quarter of 2017, pending regulatory approvals, and is expected to be funded with available cash on hand.

– In November, WellCare announced that it had entered into a definitive agreement to acquire Universal American in an all cash transaction valued at $10.00 per share of common stock. The acquisition is expected to add approximately 65,000 Medicare Advantage (MA) members in a 4.5-Star plan in Houston–Beaumont, Texas and approximately 14,000 MA members in a 4.0-Star plan in the Northeast, primarily in New York, to the company’s Medicare Health Plans membership. In addition, Universal American partners with Accountable Care Organizations (ACO) in 11 states, six of which are WellCare Medicare Advantage markets.

– In June WellCare announced that it had completed the acquisition of certain assets of Advicare Corp.’s Medicaid business, which includes the transfer of approximately 30,000 members to WellCare of South Carolina. The financial terms of the transaction were not disclosed.

WellCare clearly has a focus on growth through acquisition, for this to be successful the company needs to ensure it’s not too aggressive with its M&A strategy and pays the right price for its acquisitions. History is littered with companies that have acted too aggressively with their M&A strategy and/or paid too much for their acquisitions.

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)

We can also see is that the company has $482 million in operating earnings (ttm). Adjusted operating earnings are $610 million (ttm). We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up.

Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

With an Enterprise Value of $2.96 billion and adjusted operating earnings of $610 million (ttm), that leaves WellCare with an Acquirer’s Multiple of 6.64 or, 6.64 times adjusted operating earnings.

That means WellCare still represents good value.

Strong Free Cashflow

As mentioned above, the reason WellCare Health Plans, Inc. (NYSE:WCG) is able to consider ongoing acquisitions is its strong free cashflows.

A quick look at the company’s quarterly statement of cashflows below for the trailing months shows WellCare had $1.77 billion in operating cashflow for the trailing twelve months and capex of $104 million. That leaves WellCare with $1.67 billion in free cash flow and a FCF/EV yield of 56%.

Quarterly Cashflow Statement (Amounts in 000’s)
Quarter:	3rd	2nd	1st	4th
Quarter Ending:	9/30/2016	6/30/2016	3/31/2016	12/31/2015
Net Income	$68,600	$91,500	$37,100	$13,000
Net Cash Flow-Operating	$1,140,500	$51,900	-$112,100	$474,700
Capital Expenditures	-$23,900	-$20,800	-$16,800	-$42,400
Sale and Purchase of Stock	-$1,300	-$100	-$5,500	$300
Net Borrowings	-$100,000	$0	-$103,100	-$100

(Source: Company reports, sec.gov)

It’s important to note that in Q3 2016 operating cash flow was inflated by the advance receipt of October CMS Medicare premium and subsidy payments of $683 million in September. If we adjust the operating cashflow by subtracting the advanced receipts of $683 million that leaves $457 million in operating cash flow for Q3 2016, free cash flow of $990 million (ttm), and a FCF/EV yield of 33%.

Summary

WellCare is a well run company with a growth through acquisition strategy and a strong existing pipeline. The company has growing revenues, a strong balance sheet and loads of free cash flow.

If WellCare continues to make smart acquisitions and develop its organic opportunities in Medicaid and Medicare this is a company that will continue to grow strongly. Something else to consider is the number of provided-owned opportunities that are also starting to pop-up on the radar of WellCare.

In terms of its valuation, the company remains undervalued on both an Acquirers Multiple of 6.64 and a free cashflow yield of 33%.

Note: This article is originally published at The Acquirer’s Multiple.