By almost any valuation metric, HealthSpring (HS) appears to be undervalued. It trades with a P/E under 5, and a P/B value of .7. As a managed health care organization targetting seniors, revenues and earnings have been fairly stable over the last several years. In addition, the company has more cash than it does long term debt. For a company in such a stable industry, it is surprising to see such a conservative capital structure.
- Heath care inflation. Margins are being squeezed as revenues are not rising as fast as costs. Who knows how long this situation will persist.
- Government regulation. This is a major issue with most managed care companies. Complying with ever-changing standards and dealing with enforcement agencies is a cost that is hurting many competitors, and HS is not likely to be immune.
- Reliance on Medicare. With service rates set annually by the Centers for Medicare and Medicaid Services (CMS), HS can be caught off-guard by rate changes that are not in line with the costs. For example, 2010 CMS benchmark rates were brought down by around 5% based on the types of care HS provides.