Is WellChoice a Healthy Choice?

Now here's a stock for you. Just before Christmas, this company disclosed that its longtime CEO had been diagnosed with cancer. Two weeks later, his No. 2 abruptly quit. Those twin blows landed not even two months after the company's initial public offering. Oh, and did I mention that there's a lawsuit asking the court to invalidate the IPO?

Such are the bare facts about WellChoice (WC ), one of the few companies to brave last year's sparse IPO market, the worst since 1979. It was able to do so because WellChoice's main operating unit, Empire BlueCross & BlueShield, enjoys a formidable market position as New York's largest medical insurer. The shares came to market at 25, rose, and soon plunged (chart). Lately, they idle under 23. Given the obvious threats to its future prosperity, you might wonder why the stock isn't considerably lower. I kept asking myself that, too. Yet after taking a closer look at WellChoice, I figure that it offers more upside potential than downside risk.

WellChoice Chief Executive Michael Stocker, who is 60, told me he plans in March to begin 2 1/2 months of radiation treatment for cancer of the prostate. This may tire him, he said, but he notes that prostate cancer is relatively common in his age group--among 60-year-olds, according to the Centers for Disease Control and Prevention, it strikes 1 in 43. "It's very similar to [former New York Mayor Rudolph] Giuliani's situation when he was mayor," he said. "There's a very good chance that this will be a cure." Meantime, Stocker told me that he feels fine, is in no imminent danger, and aims to find a new chief operating officer to replace David Snow Jr. Snow joined WellChoice in 1999, five years after Stocker, who would not speculate on Snow's reasons for having quit so suddenly. Snow did not respond to inquiries.

The legal threat to WellChoice is more complicated and harder to assess. Like other BlueCross-BlueShield plans around the country, those in New York started as nonprofits. The Blues in recent years have been converting to for-profit, public companies--California's WellPoint Health Networks (WLP ) is a prime example--but often amid controversy over how they convert and how proceeds from the stock sales are used. WellChoice is no exception. A group led by Consumers Union sued last August to bar the conversion. In November, the courts declined to halt it, and the IPO went ahead a day later. But it did order New York State to freeze most proceeds from the IPO, which Albany had planned to spend on pay increases for health-care workers. A ruling on whether to dismiss the suit or to keep the IPO proceeds frozen is still pending.

What should prospective investors make of all this? My bet is the lawsuit will wind up having been a big distraction. Even if the plaintiffs win, their main argument at this point is with Albany, not WellChoice. The plaintiffs' lawyer, Mark Scherzer, told me: "Our aim is to have the value of Empire BlueCross, which is a charitable asset in our view, transferred to a foundation" for public health, instead of being used to help cover the state's budget gap. If the courts agrees, that remedy might be made without unwinding the entire conversion and IPO--a drastic and, Scherzer said, less likely prospect.

While the litigation drags on, WellChoice is simply going about its business as a newly public company. And business is improving markedly. Last year through September, revenues rose more than 9%, to $3.8 billion. At the same time, cash flow from operations swelled 16%, to $206 million, after adjusting for extraordinary items, according to Chief Financial Officer John Remshard. Full-year results for 2002, which Wall Street estimates will show net earnings of $1.83 a share, are due out on Feb. 13. For this year, the Street's consensus is for a 20% gain, to net earnings of $2.20 a share.

At that, WellChoice has been trading under 11 times 2003 earnings. That makes it look a bit beaten down next to WellPoint, which goes for almost 14 times earnings, and Anthem (ATV ), a Blues operator based in Indianapolis, at 13 times. At both of those much larger peers, long-term debt is 31% of equity. WellChoice's most recent balance sheet showed no long-term debt. So while there's no escaping the aches and pains WellChoice is feeling now, it looks to me as if it has all the resources needed to make a full recovery.

By Robert Barker

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