AET Aetna Inc. (delisted)

We are maintaining our ‘Neutral’ recommendation on WellPoint Inc. (WLP) based on the company’s revenue growth in all operating segments,increased operating cash flow, stable ratings, diversified product portfolio and strategic acquisitions. However, increasing benefit expense and declining membership are causes of concern.

WellPoint reported fourth-quarter 2011 adjusted income of 99 cents per share, trailing the Zacks Consensus Estimate of $1.11 per share. Results were also 25.6% lower than $1.33 per share earned in the year-ago quarter.

WellPoint has been witnessing substantial earnings growth over the past few quarters, spurred by improvements in its operating cost structure and strategic acquisitions. Additionally, disciplined cost control improved its SG&A expense ratio by 100 basis points in 2011.

Moreover, WellPoint’s strong capital and cash position have fueled cash dividend payouts and stock repurchases. Therefore, in 2011 the company paid $357.8 million in dividends and repurchased shares worth $3.0 billion. Additionally, management plans to buy back 2.5 million shares during 2012.

WellPoint has the independent license to market products under Blue Cross Blue Shield Association, the most recognized brand in the industry. With over 34 million members, the company is a dominant player in its entire 14 Blue Cross and Blue Shield state markets.

Management estimates more than 1.0 million baby boomers will become eligible for the Medicare program every year through 2030 across the 14 states in which its Blue Cross and Blue Shield plans already have a presence.

Although WellPoint has a large membership base consisting of almost 11% of the U.S. population, its membership has been declining since 2008. The recession and the consequent surge in unemployment levels adversely affected enrollment.

Additionally, higher medical costs in the Senior, Local Group and State-Sponsored businesses, lower favorable prior-year reserve development and the impact of minimum medical loss ratio requirements in 2011 affected the benefit expense ratio adversely. In 2011, the ratio deteriorated by 190 bps to 85.1% from 83.2% in 2010 and is expected to rise further to 85.3% in 2012.

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 the company’s first-quarter earnings stands at $2.33 per share, down about 1.05% year over year. For 2012, earnings are expected to be $7.70 per share, climbing about 10.03% year over year.

Currently, WellPoint carries a Zacks #3 Rank, which translates into a Hold rating for the near term.

 
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