PacifiCare 1st-Quarter Profits Up 79%, Stock Jumps 17%

PacifiCare Health Systems Inc., a major provider of managed health care services, posted a 79% gain in first-quarter profits and said it expects earnings per share to increase as much as 45% for the year.

The Santa Ana-based company’s stock moved up 17% after the bullish report.

PacifiCare, the largest Medicare HMO in the United States, said higher premiums and lower taxes should boost per-share earnings for the year.

In the first quarter, net income rose to $74 million, or $1.61 a share, from $41.3 million, or 90 cents, a year earlier. Results were well above the $1.28 average estimate of analysts polled by First Call Corp., which tracks company earnings. PacifiCare earnings kept growing even as the government cut increases in payments to operators of Medicare HMOs. That’s partly because most PacifiCare patients are cared for by physicians who share some costs of patient care in exchange for fixed monthly payments, a process known as capitation.

“They’ve done a great job of managing their costs,” said Kevin Risen, a fund manager with Neuberger & Berman, which holds about 2.5 million PacifiCare shares. “They have a capitated business model that’s allowed them to succeed where others have failed.”

The company’s shares rose $13.94 to $93.81 in trading of 3.7 million, more than eight times the three-month daily average.

“The earnings blew away the street,” said John Rex, an industry analyst with Bear Stearns. “Management was very bullish and pushed [earnings per share] estimates up for the year.”

Revenue rose 3% to $2.45 billion, from $2.38 billion a year earlier. Membership fell to 3.6 million, from 3.7 million as it sold some operations in Utah and left some Medicare markets it found unprofitable. Medicare is the government insurance program for the elderly.

Premiums in its commercial plans increased by about $17 million, or 2%, from a year earlier, while premiums from the government insurance plans rose about $49 million, or 4%, it said.

If earnings per share move up 40% to 45% for the year as expected, the company’s earnings would total about $6.25 a share in 1999, surpassing the $5.56 expected by analysts.

PacifiCare said Tuesday after the close of trading that it will buy back 13% of its shares from its biggest stockholder in a move to boost its share price. It will also combine its two classes of common stock into a new single class of stock.

The company said the move will increase its flexibility to structure acquisitions. PacifiCare is looking to make small acquisitions to boost markets where it already does business, both in Medicare and commercial plans.