We initiate our coverage on Healthways (HWAY), a global well-being company, with a Neutral rating. First-quarter 2011 earnings per share of 12 cents missed the Zacks Consensus Estimate of 20 cents. Revenues came in at $163 million, down 8.9% year over year.
Healthways is the leader in a strategically critical and rapidly evolving part of the health care services market. The company’s model encourages people to make favorable lifestyle changes that lead to enhanced well-being, reduced healthcare costs, improved performance and economic value for customers. Its fitness program (SilverSneakers) for seniors is available at centers across the U.S. Healthways competes with Express Scrips (ESRX) among others.
The company believes that it can satisfy the unique needs of individuals while benefiting from increasing economies of scale. It has invested in technology platforms that provide scalable support with large populations.
An improved revenue backlog figure and brisk contract activity may signal meaningful growth in the second half of fiscal 2011 and 2012. Management itself forecasts both sales and profitability to pick up, on a sequential basis, in fiscal 2011 as new contracts ramp up and performance-based fees are booked. Select long-term contracts provide the assurance of a measure of recurring revenues.
Healthways has tie-ups with 80% of U.S. health plans and counts about 38 million lives in its customer base. Growth in the U.S. is expected to slow down, and total billable lives may stagnate a bit due to factors such as high unemployment, economic uncertainty and healthcare reform. Also, on the negative side, overseas contracts wins have been few and are limited to Australia, Brazil and France. Cash flow is modest and will be utilized to pare debt.
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