WellCare Health Plans, Inc. recently received rating action from credit rating giant, Moody’s Investors Service, a wing of Moody’s Corp. (MCO Quick QuoteMCO - Free Report) . The rating agency has affirmed Ba2 senior unsecured debt rating and the Baa2 insurance financial strength rating of WellCare of Florida, Inc. The rating affirmation of WellCare of Florida was driven by the Health Maintenance Organization’s (HMO) plan to purchase health insurer – Universal American Corp – to focus on Medicare Advantage business. WellCare Health Plans is set to acquire Universal American in an all-cash transaction worth about $800 million. The outlook on the aforementioned ratings remained stable.

The ratings affirmation reflects the rating giant’s optimism about the buyout.  Moody’s believes that the acquisition will benefit WellCare Health Plans by improving its portfolio as the acquiree possesses an extensive, product-specific and infrastructure expertise. Universal American’s in-depth knowledge has helped it to maintain and manage a profitable, mainstream Medicare business. Hence, the purchase will undoubtedly be accretive to WellCare Health Plan.

Moreover, WellCare Health Plans’ robust financial condition, which is backed by stable operational performance and strong cash flow generation, is represented by the ratings affirmation. However, the rating agency has also taken into consideration the company’s weaker business profile owing to the exclusive focus on the Medicare and Medicaid segments.

The company might witness ratings upgrade if the HMO extends its geographical footprint and expands its Medicaid and Medicare product portfolio. Also, the ratings could be upgraded if the cash flow coverage ratio improves to at least 6x, and consolidated risk-based capital ratio (RBC) is maintained at least 200% if company action level and debt to EBITDA is 1.5x or lower.

On the other hand, loss or impairment of either WellCare Health Plans or WellCare Florida, Inc.’s major government contracts, negative EBITDA for any 12-month period, debt to EBITDA exceeding 3x and consolidated RBC below 150% of the WellCare Health Plans’ action level, can lead to ratings downgrade.

Shares of WellCare Health have outperformed the Zacks-categorized HMO industry, year to date. Strong growth both in the bottom line and top line, along with stellar premium and investment income growth, have led to the outperformance. Moreover, a robust liquidity position backed by strong cash flow generation has helped the company to invest in strategic initiatives, which in turn, has accelerated its growth.

WellCare Health Plans sports a Zacks Rank #1 (Strong Buy). We expect prudent acquisitions such as the one mentioned above to not only boost the company’s growth but also lead to better results. You can see the complete list of today’s Zacks #1 Rank stocks here.

Another Stock to Consider

Investors interested in other stocks from the same space can consider Humana Inc. (HUM Quick QuoteHUM - Free Report) .

Humana, a health and well-being company, delivered positive surprises in three of the last four quarters, with an average beat of 1.94%. The company holds a Zacks Rank #2 (Buy).

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