Is there a First Health in CorVel's future
CorVel's stock has hit the stratosphere, giving the company a market cap of over half a billion dollars, and a PE of 37. The stock's price has more than tripled in the last year, and trading has been particularly heavy over the past few weeks, with volumes up substantially over the last two months.
What's not behind the good news is an increase in revenues, as this year's third quarter revenues mirrored those of 2005. Profits have more than doubled in that time, but administrative expenses also climbed. The little I know about stocks indicates that a high PE is usually associated with a company experiencing rapid growth that is also able to maintain profit levels.
That sure doesn't look like the case here. Here's why.
CorVel's markets are the group health, auto, and workers comp industries; my sense is most of their revenues come from WC. The company's products are case management (field and telephonic) and utilization management, bill review, networks, physician advisers/peer review, and certified managed care plans in various jurisdictions. A highly decentralized company, CorVel's only national WC insurer client is Chubb, a mid-tier insurer.
WC injury rates have been declining for the past umpteen years, meaning CorVel has fewer injuries to manage. This decline has been blamed (by management) for the company's steadily decreasing revenues - (from the annual report) "$267 million for fiscal year ended March 31, 2006, a decrease of $24 million, or 8% compared to $291 million in fiscal year ended March 31, 2005. The Company reported sequential declining quarterly revenues for the first three quarters of fiscal year 2006. Sequential revenue decreases for the first three quarters of fiscal 2006 were 3%, 6%, and 5% from the previous quarter."
And this has not been only a recent phenomena; CorVel's revenues in FY 2004 were $305 million, dropping to $291M in 2005 before hitting $267M in 2006.
So, the dropping number of injuries results in fewer opportunities for CorVel to bill services.
The company's UM and CM services have also been hit by the industry trend to internalize or avoid using nurses for field case management, and when nurses are used, to pay them by the task rather than an hourly or monthly rate. As a result, CorVel's UM/CM revenues declined by $16 million from FY 05 to FY 06.
I don't pretend to understand the machinations of the stock market, but it appears that someone(s) out there think(s) CorVel is going to be worth a lot more in the future than it's current financials would indicate.
The only way that could happen is if CorVel gets acquired.
A few sources think that may be the case. One likely acquirer is competitor First Health, which according to FH's owner Coventry Health's public statements,is on the hunt for acquisitions in WC.
Other confidential sources indicate FH is involved in due diligence on an acquisition. And Coventry was looking at CorVel in 2005.
If FH is looking at CorVel, I'm really underwhelmed. Both companies have experienced flat to declining revenues over the past two years; both are facing very tough competition from new and rapidly emerging competitors, and neither has proved itself up to the task.
Then again, the management folks at Coventry are not exactly novices at business; perhaps they see something here I don't.