Catalyst Health Stays Neutral - Analyst Blog
26 Abril 2012 - 12:45PM
Zacks
We maintain our ‘Neutral’ recommendation on Catalyst
Health Solutions Inc. (CHSI) based on its imminent
takeover by SXC Health Solutions Corp. (SXCI),
which is expected to boost the merged company’s competitive
strength. The Invest Now program should also be beneficial to
earnings.
However, weak financial leverage and dependence on a couple of
clients for a large portion of revenue are the downsides.
Catalyst Health reported fourth-quarter operating earnings per
share of 69 cents, beating the Zacks Consensus Estimate by 3 cents.
The result also compares favorably with 56 cents earned in the
prior-year quarter.
Catalyst Health’s takeover by SXC Health is expected to be
beneficial for its clients, who will be able to reap the benefits
of SXC Health’s expertise in pharmacy benefit management services
(PBM) as well as its industry-leading technology. The clients will
also have access to a wider product portfolio.
Moreover, SXC Health shares Catalyst Health’s customer-centered
approach as well as commitment to lowering healthcare costs without
compromising on the quality. The acquisition will also help the two
companies retain their competitive advantage in the rapidly
consolidating PBM industry, which is leading to intense price
competition.
Moreover, the Invest Now program – launched in 2011 – is
expected to double the annual new business of the company over the
next two years. While the initiative is expected to increase the
SG&A expenses by $15 million in 2012, it is projected to
generate a 300% return on investment from 2013 onwards. Moreover,
the program will likely boost revenue by $400–500 million and
EBITDA by $16 million from 2013.
However, Catalyst Health faces high debt obligations with
inadequate cash balance, which casts a shadow on the company’s
liquidity in both the long and short term. The company might find
it difficult to meet its short-term obligations as its current
liabilities exceed current assets. Moreover, the long-term debt is
over five times the cash and cash equivalents, while the operating
cash flow of Catalyst Health remains unsteady.
Furthermore, the PBM industry is highly competitive and
dominated by large players, such as CVS Caremark
Corporation (CVS), Medco Health Solutions, Inc. and
Express Scripts Holding Co. (ESRX), who possess
superior financial and technical resources compared to Catalyst
Health.
Moreover, the company is highly dependent on a limited number of
clients for a significant portion of its revenues. The company’s
largest customers, Independence Blue Cross and Wellmark Blue Cross
Blue Shield of Iowa, accounted for 16% and 10% of consolidated
revenue, respectively, in 2011. The profitability and growth
prospects of the company could be affected adversely by the loss of
such key customers.
The Zacks Consensus Estimate for Catalyst Health’s first-quarter
2012 earnings stands at 57 cents per share, up an estimated 10.5%
from the year-ago quarter. For 2012, earnings are expected to be
$2.66 per share, a forecasted growth of 12.4% over 2011.
Currently, Catalyst Health holds a Zacks #3 Rank, implying a
short-term ‘Hold’ rating.
CATALYST HEALTH (CHSI): Free Stock Analysis Report
CVS CAREMARK CP (CVS): Free Stock Analysis Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
SXC HEALTH SOL (SXCI): Free Stock Analysis Report
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