Mid Atlantic Medical Services Inc. stock tumbled almost 13 percent yesterday in heavy trading after analysts questioned whether the Rockville managed-care company can continue its spectacular growth.
The stock dropped $6.125, to close at $41.75 a share, on a day when an analyst with the company's main investment banker, Smith Barney Shearson, lowered his rating from "buy" to "hold," concluding that the company could not sustain its growth.
The sell-off came despite MAMSI's announcement that second-quarter earnings had more than tripled over the same period last year as its medical claims dropped, a reverse of what usually happens in the second quarter for managed-care companies. MAMSI attributed the earnings to lower medical inflation, less use of its medical services and increased membership.
More than 3.68 million shares, or more than five times the average daily volume in recent months, changed hands in trading on Nasdaq.
Yesterday's drop follows a general downturn this month in managed-care companies' stocks, after HMOs in California cut prices, and also amid a spate of stock sales by MAMSI insiders.
Still, the market reaction surprised many analysts who rate MAMSI stock a good buy and have high expectations for its continued growth. "I thought they [earnings] were great," said Margot Durow of Punk, Ziegel and Knoell in New York, who noted MAMSI enrolled 2,000 more members than she had predicted for the quarter.
"I had a hard time understanding why the stock is down," she said, but she speculated that the sell-off could be the result of an increasing number of short sellers in MAMSI's stock. She and several other analysts dismissed the insider sales as nothing unusual. Five of the company's top executives have sold 10 percent or more of their stock in the past five months.
Before yesterday's slump, MAMSI shares had risen to more than $50 from $8 in a year as the result of beating analysts' predicted earnings for four consecutive quarters. The company owns health maintenance organizations known as Optimum Choice Inc. and M.D. IPA and rents a large network of doctors under the name Alliance to other insurers and corporations.
"The worry is, things can't get any better," said George F. Shipp, analyst with Scott & Stringfellow in Richmond, Va. "It was the third quarter in a row where they said, 'We're doing well, we see growth, but please don't expect us to keep up these margins,' " he said, adding he is not recommending the stock because it is dominated by short-term speculators rather than "those in it for the long term."
For the quarter that ended June 30, MAMSI reported revenues of $181.7 million, up 13 percent over the same period last year. Net income was up 280 percent, to $11.8 million, and earnings per share rose to 50 cents, from 14 cents last year. Analysts' expectations had ranged from 36 to 48 cents per share.
In a conference call with MAMSI Chairman, President and Chief Executive Officer George T. Jochum yesterday, analysts questioned why the company's set-aside to pay medical bills incurred for the quarter was about $5 million lower than they estimated it should be to match the quarter's growth in premiums, according to two analysts in on the call.
According to the analysts, Mr. Jochum said it was an aberration and the trend would not continue, meaning medical claims would be flat or increase in subsequent quarters.
Kurt Funderburg, analyst with Ferris, Baker Watts in Baltimore, agreed that the biggest factor in earnings growth "was the unusually large drop in medical loss ratio," or amount of every dollar that goes to pay medical bills.
But he called the development "extremely positive," saying MAMSI had fewer people in the hospital than it expected and more members using primary care doctors instead of expensive specialists. "They had excellent medical expense control," he said.