Why is Steven Cohen Betting on This Healthcare Stock?

SAC CAPITAL ADVISORSIn a 13G filing this week, SAC Capital announced a 5% ownership stake in Magellan Health Services Inc (NASDAQ:MGLN) of 1,380,530 shares. Magellan is engaged in the specialty managed healthcare business, providing services to health plans and insurance companies. This new position is a huge increase in Magellan for SAC Capital, who owned only 16,300 shares at the end of 1Q.

HealthCor Management has been the top fund in the Magellan for at least a year and a half – owning about 8% of the company as of the end of June. Arthur Cohen and Joseph Healey founded HealthCor in 2005 – both of whom worked at SAC Capital before HealthCor. When Arthur and Healey left SAC Capital, SAC filed a lawsuit against them citing breach of employment contract; the case was later settled out of court.

SAC Capital’s investment comes days after Magellan launched its total drug solutions initiative, which offers complete drug management capabilities. The platform gives the company the ability to manage all drugs – oral, injectable and infusible – to improve quality and safety, while lowering costs for consumers and health plans. Magellan is up over 3% in the past month, though has still been relatively flat year to date.

Magellan reaffirmed strong 2012 guidance and expects net revenue in the range of $3.2-$3.4 billion, and net income in the range of $91-$109 million—translating into EPS in the range of $3.25-$3.89. Analysts expect Magellan to report revenue of $3.3 billion and net income of $100 million—putting EPS near the top range of company guidance of $3.75 for fiscal 2012. Magellan also beat 2Q EPS estimates by 7%, posting $0.97 EPS, versus $0.91 estimates. Although the company’s president resigned in June, it still managed to reach all-time highs—around $55—in stock price during July. Since this time the company’s stock price has reverted and is now around $50.

The proverbial giant in this industry is UnitedHealth Group Inc. (NYSE:UNH). UnitedHealth recently replaced Kraft in the Dow Jones Industrial Average. Prior to that the company announced 2Q results of $1.27 EPS, versus $1.16 estimates. The company is expected to grow EPS by 11% next year and trades at a trailing P/E of 11 and a forward P/E of 10. The company is being driven by strong member additions – 1 million commercial members and 1.15 million fee-based members, while Medicare Part D members is expected to decline by 615,000. The company has solid prospects and saw David Einhorn with Greenlight Capital take a new position during 2Q-equating to 2.3 million shares. UnitedHealth also made our list of the ten most popular healthcare stocks among hedge funds.

Other competitors, more comparable in size to Magellan, include Conventry Health Care, Inc. (NYSE:CVH), WellCare Health Plans, Inc. (NYSE:WCG) and AMERIGROUP Corporation (NYSE:AGP). Coventry recently agreed to be purchased by Aetna. The company expects to increase revenues by 16.6% for full year 2012, driven by a Kentucky Medicaid contract. The company is up 38% on the Atena news, even after posting $0.65 EPS well below $1.50 estimates.

WellCare recently announced plans to acquire Easy Choice Health Plan, Inc., giving the company a western U.S. presence. WellCare’s 2Q EPS came in at $1.24 versus consensus estimates of $1.21, with revenue up 22%. However, their medical cost ratio (the ratio of healthcare costs to premium revenues) was also up, at 86.4% versus estimates of 81.9%. Full year EPS is expected to be down 20% from last year.

WellPoint agreed to purchase AMERIGROUP back in July for $4.9 billion, putting the stock up 54% year to date. As a result the company currently trades well above the others at a 31 trailing P/E. Since the acquisition announcement, WellPoint’s CEO resigned amid the company’s struggling performance. AMERIGROUP’s CEO is said to be in the running for the CEO position at WellPoint.

Alongside SAC, with around a 5% ownership stake in Magellan is Jim Simons’s Renaissance Technologies at 1.2 million shares. Rounding out the top five funds owning Magellan by shares are Royce & Associates, D.E. Shaw and AQR Capital Management.

Magellan trades at a trailing P/E of 13 and a forward P/E of 12. The company’s P/E is in line with its peers, but the M&A activity and relative attractive growth of Magellan could put it in the crosshairs for a takeover, and perhaps this is what Steven Cohen is betting on. If not, Magellan still has strong growth prospects and is expected to grow EPS at a 5-year CAGR of 18%.