WellPoint Stays 'Outperformer' - Analyst Blog
08 November 2011 - 7:15PM
Zacks
We reiterate our
Outperform recommendation on WellPoint Inc.
(WLP) based on the company’s top- and bottom-line growth in the
third quarter of 2011 coupled with improved earnings outlook for
2011.
WellPoint reported third-quarter
2011 operating earnings of $1.77 per share, striding ahead of the
Zacks Consensus Estimate of $1.69 per share. Results were also 1.7%
higher than $1.74 earned in the year-ago quarter.
WellPoint has been witnessing
substantial earnings growth over the past few quarters, spurred by
membership gains, improvements in operating cost structure,
strategic acquisitions and capital transactions.The company’s
strong capital and cash position have also fueled cash dividends
and stock repurchases.
While WellPoint began cash dividend
payouts in early 2011, it has also been aggressively buying back
shares and is constantly utilizing its excess capital to retain investors’
confidence.
The company strengthened its
portfolio through the acquisition of CareMore Health Group in order
to expand its presence in the U.S. government program for the
elderly.
Additionally, WellPoint
collaborated with Health Care Service Corp. and Blue Cross Blue
Shield of Michigan to purchase a stake in Bloom Health, a private
online health insurance exchange, to facilitate the expansion of
its health insurance business.
Moreover, WellPoint has the
exclusive right to market products under the Blue Cross Blue Shield
Association (BCBSA), the most recognized brand in the industry.
With over 34 million members, WellPoint is a dominant player in its
entire 14 Blue Cross and Blue Shield (BCBS) state markets, and its
ability to access the provider networks of any other BCBS plan
across the US further reinforces WellPoint’s competitive strength
against peers like Aetna Inc. (AET), CIGNA
Corporation (CI) and UnitedHealth Group
Inc. (UNH).
The company is also well poised to
benefit from economies of scale and favorable demographic trends.
As a result, WellPoint continues to maintain its leading position
in the National Accounts marketplace based on its disciplined
pricing for both new business and renewals.
However, on the downside,
WellPoint’s debt-to-capital ratio increased from 25.3% in 2009 to
29.7% in the third quarter of 2011. Although the ratio is still
within the targeted range of 25% to 35%, as indicated by the bank
covenants, it stands higher than average for the health and managed
care sector.
Additionally, higher unit cost
owing to health reform coupled with lower-than-expected underlying
utilization has been driving medical costs upward. Besides,
management expects Senior business to be low in the remaining part
of 2011, given the ongoing challenging economic environment. The
company is also expected to continue experiencing modest attrition
throughout the second half of 2011.
Further, though some provisions of
the health care reform legislation became effective in 2010 and
2011, further changes will come into effect after 2014, which may
adversely affect WellPoint. Delayed product approvals for new
health care reform compliant products are already affecting
membership growth adversely.
Going ahead, the provisions of the
new law are likely to pressure profits
as WellPoint and other health insurers are tied to the
ongoing weak demand for their products and services and
uncertainties related to implementation of health insurance
reforms.
Overall, with its leading market
share positions, stable ratings, diversified product portfolio,
strategic acquisitions and consistency, we believe WellPoint has a
solid long-term growth potential. The company carries a Zacks #2
Rank, which translates into a Buy rating for the near term.
AETNA INC-NEW (AET): Free Stock Analysis Report
CIGNA CORP (CI): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
WELLPOINT INC (WLP): Free Stock Analysis Report
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