Health-care costs, AGP profits soar

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Dear Mr. Berko:

Please tell me about Amerigroup, which is a managed-care company. I would like to buy 150 shares for my account as a two- to three-year investment for capital gains. It looks like a conservative company, and if earnings continue to grow, I think that I might be able to sell at or near $65 or $70. What do you think?

G.L., Moline, Ill.

Dear G.L.:

Amerigroup Corp. (AGP-$43.10), like thousands of other companies in similar fields, is one of the prime reasons the United States has the highest health-care costs in the world. AGP is one reason health-care costs will continue to rise faster than fuel costs, home prices, the federal deficit or college tuition.

AGP is one of those managed-care organizations that make certain everyone who can qualify for Medicaid, state children’s health insurance programs and Family Care is enrolled for those services. The company continually strives to enlarge its coverage by increasing the number of people it serves, expanding into new markets, creating new programs for its members, developing new social programs to be paid from state taxes and designing psychological services that also will be covered by the various states in which it operates.

AGP’s Americaid product is supposed to be a “family-focused” (what nice-sounding words) Medicaid service designed for low-income children and their mothers. The company continues to aggressively increase its enrollment numbers.

Amerikids is a managed health-care program for children who do not qualify for Medicaid. AGP is aggressively increasing those enrollment numbers, too.

Ameriplus is another dreamed-up managed-care program for Supplemental Security Income recipients. Amerigroup also has enjoyed excellent growth in this program.

Finally, there’s the company’s newest scheme, Amerifam, which is a managed family health-care program for every citizen (and non-citizen) who is uninsured. AGP expects that family care is going to attract very big bucks.

Basically, AGP is a health-care industry bottom-fisher that sucks up billions of dollars in state and federal money to finance its myriad programs and then takes its vigorish off the top.

The Managed Health Care Index is up nearly 9.2 percent so far this year. This gain reflects the industry’s (and investors’) expectations of very healthy profits this year and next. Certainly the broad-based share appreciation over the past four months is a result of investor optimism, a strong economy, higher health-care expenditures by state and federal governments, increased participation in various managed-care programs by users and growing enrollment from non-users.

The investment outlook for this industry is extremely positive. Strong earnings growth is expected this year and in 2005, which will be fueled by huge premium increases that outpace double-digit rises in medical-care costs. Strong earnings are forecast as managed-care organizations such as AGP, PacifiCare Health Systems, UnitedHealth Group, Aetna, HCA, Wellpoint Health Networks Inc. and Tenet HealthSystem Medical Inc. lower their costs by reducing physician payouts, negotiating lower hospital costs, reducing prescription costs and limiting patient access to these and other medical services.

AGP is a veritable money machine. When you include AGP’s corporate colleagues, they collectively make almost as much money every year as the U.S. Mint.

The company came public in 2001 at $20 a share with revenues of $880 million and net income of $1.95 a share. By 2003, revenues had grown to $1.6 billion and AGP earned $2.90 a share. This year, it might take in about $2.2 billion and expects per-share earnings, after adjusting for non-recurring costs of various acquisitions, of $3.16. In 2005 the suits on Wall Street believe that AGP can earn, not including potential acquisitions, $3.60 a share.

That’s a ton of earnings for a company that doesn’t prescribe pills, perform surgery, provide crutches, administer anesthesia, make medical diagnoses, take X-rays, read ultrasounds, deliver babies, remove appendixes, give injections or clean bedpans. For not doing all of this, Chief Executive Officer Jeff McWaters was paid $2 million last year, President Jim Carlson got $1 million, Chief Financial Officer Scott Tabakin was paid $600,000 and 2,100 employees were probably paid $80 million.

Legg Mason and CIBC World Markets have a “buy” rating on AGP, which trades at an attractive 14.9 times earnings with no debt and a solid cash position. If AGP earns $3.60 a share for not doing all of those things, its share price could trade between $55 and $57 in the next 12 months.

Certainly a well-run managed-care organization like AGP, with good underwriting skills, superb cost controls (denial of services), rising premium income, a growing membership and creative new services could sustain an annual growth rate between 16 percent and 20 percent. So AGP, a couple of years out, could give your portfolio some good juice and potentially trade between $65 and $70.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.