WellPoint Downgraded to Neutral - Analyst Blog
December 19 2011 - 4:45AM
Zacks
We have downgraded our recommendation on WellPoint
Inc. (WLP) to Neutral from Outperform based on lack of
momentum in the earnings outlook.
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 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. Additionally, disciplined expense control in SG&A
expenses has also helped its expense ratio to improve by 40 basis
points (bps) year over year to 14.0% in the third quarter of
2011.
WellPoint’s strong capital and cash position have also fueled
cash dividends and stock repurchases. Besides, a stable operating
performance, strong operating cash flow and solid statutory capital
have also
inspire confidence among the rating agencies.
In December 2011, A.M. Best also assigned a “bbb+” rating to
WellPoint’s senior unsecured debt, “bbb” to its subordinated debt
and “bbb-” to the preferred stock, all of which were registered
through the universal shelf registration process.
Moreover, WellPoint is a dominant player in its entire 14 Blue
Cross and Blue Shield state markets, and its ability to access the
provider networks of any other BCBS plan across the US further
reinforces the company’s competitive strength. Although membership
is expected to be sluggish in the fourth quarter of 2011,
management expects a number of new sales beginning 2012, which is
encouraging.
However, on the negative side, WellPoint’s debt-to-capital ratio
has been increasing steadily. It surged from 25.3% in 2009 to 27.3%
in 2010 and 29.7% at the end of 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.
Moreover, the impact of the health care reform on health
insurance premiums is uncertain and will vary significantly by
market, due to the fact that the new and existing rules differ
between the individual, small employer and large employer
markets.
Though some provisions of the legislation became effective in
2010 and 2011, most provisions, such as annual fees on health
insurance companies, excise tax on high premium insurance policies,
guaranteed coverage requirements and the pre-requisite that
individuals obtain coverage, will come into effect after 2014.
Going ahead, the provisions of the new law are likely to
pressurize 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.
WellPoint is the largest insurer on the basis of enrollment,
beating competitors like Aetna Inc. (AET),
CIGNA Corporation (CI) and UnitedHealth
Group Inc. (UNH). Currently, the Zacks Consensus Estimate
for WellPoint’s fourth-quarter earnings stands at $1.11 per share,
down about 16.5% year-over-year. For 2011, earnings are expected to
be $7.08 per share, climbing about 5.1% year-over-year.
Currently, WellPoint carries a Zacks #3 Rank, which translates
into a Hold 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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