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This Hmo Should Get Well Soon

Inside Wall Street


The market can be merciless on hot growth stocks when earnings start to slow. Just look at Mid Atlantic Medical Services (MME), the largest operator of health-maintenance organizations (HMOs) in the District of Columbia-Maryland-Virginia region. The shares, which reached a high of 30 in October, dropped to 24 in February, when the company reported results for the fourth quarter and for all of 1994. Even though the Street's earnings expectations of $1.15 per share were met, the stock has fallen to 20. At this price, many pros think this Big Board stock is dirt cheap.

Mid Atlantic's fans acknowledge that, unlike 1994, this year won't see earnings double or even come close. Cost-containment and fierce competition are bearing down on HMOs, and no one's counting on premium hikes. Still, analysts expect earnings of $1.45 a share in 1995--a 26% gain. If they're right, the stock is selling at only 14 times earnings and at a 20% discount to the HMO industry. "It's the most undervalued company I follow," says analyst Margot Durow of Punk, Ziegel & Knoell.

Institutional investors give Mid Atlantic management high marks for delivering good service while keeping an eye on profits and adding new members. In January alone, membership grew 10%, and Durow thinks the increase will be 25% for the first quarter. What's more, 90% of the doctors in its network are board certified, well above the national average, which is a strong selling point.

Then why is the Street down on this HMO? Perhaps because, unlike the big outfits such as United HealthCare and U.S. Healthcare, Mid Atlantic is a regional company. But there's plenty of room for expansion in Virginia and the Carolinas, where HMO penetration is light.

John Ballen, who manages the MFS Emerging Growth Fund, says that Mid Atlantic's regional dominance will help it win a good chunk of the growing Medicaid and Medicare business. To rein in costs, says Ballen, "states will have to push Medicaid recipients into HMOs, and the Feds will incentivize Medicare patients to enroll." MFS is Mid Atlantic's largest shareholder, with an 8.3% stake.

Edward Keaney of Volpe Welty believes the stock will reach 35 by yearend. If investors don't recognize the stock's value, some think another HMO operator will. The company could fetch 35 to 40 a share in a buyout.BY JEFFREY M. LADERMAN

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