Goldman Sachs Upgrades WellCare Health Plans (WCG) to Buy

Goldman Sachs upgraded WellCare Health Plans (NYSE: WCG) from Neutral to Buy with a price target of $80.00. Analyst Matthew Borsch sees earnings recovery potential and asset value.

"We have added WCG to the Americas Buy List and see 30% potential upside driven by earnings recovery and/or an acquisition of the company given WCG’s need for improved infrastructure and the consolidation trend in managed care," said Borsch.

"Our action follows a 20% drop in WCG stock on Friday, July 25 (vs. SP500 -0.5%) and WCG’s sharply lower view of 2014 earnings. While we lower our 2014/15 EPS to $2.00/$3.15 (vs. prior $4.00/$4.80), we maintain our 2016 EPS at $5.55 to reflect the likelihood of earnings recovery. While much is WCG-specific, there are sector risks of earnings disruption. In that sense, WCG is sector-relative “de-risked” (i.e., damage already done), in our view," he continued.

"We see substantial upside potential to currently depressed earnings. For example, 2015 EPS could be above $6.00 if WCG were to bring its after-tax profit margin up to 2% and near $10.00 in 2016, with a net margin of 2.5% (by comparison, the net margin was 2.1% in 2013 and an average of 3.3% over the past three years). From a separate perspective, our theoretical M&A value also implies potential upside that might be recognized via an acquisition. Specifically, WCG shows the greatest upside potential in the group when we value it by applying standardized per-member values for Medicare (MA and PDP) and Medicaid under our M&A model. This holds even after we apply a WCG-specific discount of 20% to reflect currently impaired profitability," he added.

For an analyst ratings summary and ratings history on WellCare Health Plans click here. For more ratings news on WellCare Health Plans click here.

Shares of WellCare Health Plans closed at $61.61 yesterday.

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