Wall Street gave PacifiCare Health Systems Inc. a big dose of bad medicine Tuesday, knocking down its stock price 21% after the managed-health-care company said it will post "substantially lower" financial results for the second quarter.
Analysts said fierce competition among health maintenance organizations in California has limited profits industrywide, but PacifiCare's disappointing results stem largely from weaknesses in FHP International Inc., the beleaguered company PacifiCare bought early this year.
Cypress-based PacifiCare also contributed to the stock's huge drop, analysts said, by failing to explain more fully why revenue and earnings will be lower than Wall Street's estimates.
"Uncertainty wreaks havoc on a stock, and that's what happened today," said analyst Eleanor H. Kerns of the Alex. Brown investment banking firm.
The company said it expects to provide details later this week.
PacifiCare, the nation's fifth-largest managed-care company, released a cryptic statement about lower results after the market closed Monday.
It said only that the reasons included "substantially lower performance in a number of FHP markets and disappointing results in California for the month of May." When the market opened Tuesday, Wall Street hammered both classes of PacifiCare's common stock; the number of shares traded was more than 10 times the daily average for the last three months.
The company's Class A voting stock plummeted $17.25 to close at $63.75, while its Class B nonvoting stock sank $18.75 to close at $66.75, on Nasdaq.
Traders "assume the worst, and we understand that," said PacifiCare spokesman Ben Singer. "The reason for the delay in providing details is so we can get our hands around the financial issues, like how deep is deep?"
Singer said the company should still be profitable, but projections for the quarter and the year are being revised downward.
Analysts had expected the company to earn $1.16 a share for the second quarter period and $4.84 a share for the year. On Tuesday, many of them dropped their annual estimates by 55 to 85 cents and downgraded their recommendations from "buys" to "holds."
"Clearly, things are worse than anticipated at FHP," said Peter H. Costa, an analyst in the Boston office of ABN AMRO Chicago Corp. "I'm not sure whether you can fault PacifiCare management for overly optimistic expectations for turning FHP around or for not getting what they expected."
One source familiar with PacifiCare's efforts to integrate FHP operations said PacifiCare executives have been upset with the way FHP left its records. PacifiCare found incomplete or inadequate records and work that wasn't done or was done poorly, the source said.
Singer wouldn't comment directly on the state of FHP records, saying only that there are "some concerns" about the integration of the two companies.