What next for Mid Atlantic?

Donald Saltz

March 06, 1992|By Donald Saltz

How surprising a stock can be. One of the analysts' favorites is Mid Atlantic Medical Services, a Rockville-based holding company for health-care organizations that this week reported its best year ever.

Revenues soared and earnings improved substantially as the company increased the number of people it serves by more than two-thirds to nearly 600,000 people. So what did the stock do when the 1991 report was issued on Tuesday? It fell 3 points, to 11 1/4 , in very heavy trading.

Analysts who were somewhat cool to Mid Atlantic last year have warmed up in recent months. In fact, it was especially popular in year-end lists of '92 favorites.

The company had a strong year -- revenues increased a huge 84 percent and profits 26 percent to $9.7 million. But big investors don't like surprises, and they got one with Mid Atlantic: It did not meet its own earnings expectations of 75 cents a share for the year, finishing instead at 68 cents. The company had earned 50 cents a share the year before. The latest period, the fourth quarter, registered similar percentage gains.

The recession cut into Mid Atlantic's results in a very unusual way. At the end of 1990, the company provided medical coverage for 345,000 people. Another 245,000 came under the umbrella last year, a powerful growth number. However, Mid Atlantic noted that many members, concerned about losing their jobs, made sure to use their medical coverage while they were still working, which was costly.

Additionally, the company lost some payments for its services because some member companies were forced into bankruptcy or simply went out of business. An outbreak of flu also cut into profits.

Even at a share price of about 11, Mid Atlantic shares sell for 16 to 17 times earnings. It isn't cheap based on the traditional price-earnings ratio, but it is potential that can move a stock price. The share price has moved as if on an elevator in the past year, touching 6 1/2 on one end and almost 19 on the other. In 1990, it ranged from 2 1/2 to more than 10.

However, since its inception, Mid Atlantic has grown steadily and rapidly with solid earnings increases every year.

One of Mid Atlantic's most popular medical coverage plans is its M.D. IPA Preferred, which, for an additional premium, permits its members to use their own doctors. But although the company's plans are popular, it is profits that investors seek, and a continued economic slowdown will keep total costs higher than normal and thus cut into earnings.

Tax-free attraction

All year long, mutual funds that offer federal tax-free bond funds pound away with sales programs that emphasize how much taxable investments would have to yield to match the tax-frees. As many of us do our income taxes, the idea of tax-free income makes a greater impact.

What we may not realize is the stability in high-yield funds that are generally regarded by the public as holding low-quality bonds. The overall quality of the bonds is better than believed, as shown by the Tax Free High Yield Fund offered by T. Rowe Price. In this fund, 72 percent of the bonds are investment grade (BBB or better), and only 28 percent are below investment

grade. The share price ranged less than 4 percent from high to low last year. It yields between 6.8 and 6.9 percent.

In contrast, the T. Rowe Price Tax-Free Income Fund has all investment-grade bonds-primarily AA and A -- and its fluctuation last year was near 6 percent.

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