Description

This is a long term option on a restructuring company in a recovering industry. The stock has traded down from a high of $30 in 1996 to a recent $1 per share (the stock is currently depressed due to the rights offering at $1/share which closed on October 6th - final results pending).

BUSINESS & INDUSTRY

Maxicare Health Plans, Inc. (MAXI) is a holding company that owns various operating subsidiaries, primarily in the field of managed health care. The Company and its subsidiaries operate health plans in California, Indiana and Louisiana and have a combined enrollment of approximately 466,600 as of December 31, 1999. In addition to the HMO subsidiaries, the Company owns and operates Maxicare Life and Health Insurance Company and HealthAmerica Corporation. Through these subsidiaries, the Company offers an array of employee benefit packages, including group HMO, Medicaid and Medicare HMO, preferred provider organization, point of service, group life and accidental death and dismemberment insurance, administrative services only programs, wellness programs and other services and products.

Industry fundamentals have been improving since late 1999 with rising premiums, cutting unprofitably business lines, consolidation and a focus on profitablity. The industry has been trading up since then in spite of overall market turmoil.

(see chart at http://stockcharts.com/charts/$RXH.html

While there are others in this industry which are also attractive (including Aetna as posted by another member), MAXI has probably the highest potential upside with substantial risks as well.


RESTRUCTURING

MAXI got caught by an overly aggressive industry expansion in 1996/1997 and has suffered with most in the industry. Their decision to exit businesses in several states and concentrate on California and Indiana and exit some unprofitable business lines in these states should substantially improve operations. Add improving industry fundamentals and you have the potential for a substantial improvement in operating results. In addition the company is investing in technology to manage its cost base more effectively. John Gutfreund, is the former chairman of Salomon Brothers and currently president of Gutfreund & Co., an investment banking and consulting firm has been recently added to the board among others to enhance prospects for the company.

POTENTIAL UPSIDE

With improving industry fundamentals and company restructuring the company should be able to earn $25 MM, or approx. $0.54 per share (on its enlarged capital base - assuming 100% adoption of rights issue) applying a modest PE of 10x you get a $5.40 stock or 400% upside.

Post-rights offering the company will have over $111 MM in cash/investments, no debt and a current market cap of only $48 MM. Add a $400 Million NOL as an added benefit.

RISK FACTORS

With no debt and substantial cash/investments and a soon to be completed rights offering, Maxi should have limited bankruptcy risk which has been the kiss of death to many players in this sector. However, the inability to complete a successful turnaround in the next 3 years is the leading risk for the company. Political meddling in the HMO industry after the election could throw cold water over the industry recovery and Maxicare restructuring efforts and delay things considerably.

Catalyst

The combination of improving industry fundamentals and ongoing restructuring of the company should boost operating results substantially over the coming 2-3 years. The lifting of the rights issue cloud in the short term could help Maxicare play catch to the sharp rebound many players in the industry have seen this year.