AET Aetna Inc. (delisted)

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.

 
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WELLPOINT INC (WLP): Free Stock Analysis Report
 
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