Aetna Stands Out In Strong Group

1/16/2012


  Recent Price
$44
  Dividend
$0.70
  Yield
1.6%
  P/E Ratio
9
  Shares (millions)
377
  Long-Term Debts as % of Capital
27%
  52-Week Price Range
$46.01 - $32.20

As an industry, managed care looks like a solid investment. The 13 managed-care companies in the S&P 1500 Index earn average ranks of at least 85 in Quadrix Overall and both of the sector scores we designed to compare stocks within the health-care sector. Among those managed-care stocks Aetna ($44; AET) stands at the top, with an Overall score of 100 and 100 in both sector scores. Aetna, the third-largest U.S. managed-care company by enrollment is a Buy and a Long-Term Buy.

Low bar, big potential

Wall Street expects little from Aetna in 2012, projecting a 1% decline in per-share profits in 2012 despite 5% sales growth. In December, Aetna said it expected patient utilization to rise from unusually low levels in 2011 and membership to decline 2.7% in the first quarter of 2012 because of lost contracts and corporate cost-cutting. However, Aetna sees membership rising for the rest of the year.

A focus on narrow regional provider networks and use of risk-sharing arrangements should help Aetna achieve better provider discounts, thus allowing the freedom to underprice peers and boost share in the commercial market over time. The Medicare business (408,000 insured at the end of September, just 2.2% of total medical enrollment of 18.2 million) is poised to expand immediately. The company's existing client base contains about 1.2 million people eligible for Medicare Advantage who do not have coverage.

Aetna also provides dental coverage for 13.6 million members and pharmacy benefits for 8.1 million. Health-care businesses generated 92% of Aetna's operating earnings in the nine months ended September. Group life insurance (7%) and pensions (1%) accounted for the remainder.

At nine times trailing earnings, Aetna trades at a 14% discount to its five-year average price/earnings ratio. The stock also commands discounts of at least 13% to five-year norms based on price/sales, price/operating cash flow, and price/book ratios. Uncertainty about the effects of health-care reform weigh on the entire managed-care industry, accounting for at least part of Aetna's discount relative to its history. But at nine times projected 2012 earnings, Aetna also trades at a 25% discount to its peer group.

Looking ahead

Both the company's 2012 guidance and the consensus seem unduly conservative considering Aetna's operating momentum (40% growth in per-share profits and 74% growth in operating cash flow over the last 12 months) and the fact that Wall Street analysts consistently underestimate the company. In the first three quarters of last year, Aetna outperformed profit expectations by an average of 31%.

After spending $1.6 billion on acquisitions last year, Aetna is hungry for more, expecting the financial struggles of smaller rivals to yield bargains. But the company also invests heavily in its own stock, reducing the share count by 22% over the last three years. In December, Aetna increased its quarterly dividend 17%, and the stock's indicated yield of 1.6% is the industry's highest. An annual report for Aetna Inc. is available at 151 Farmington Ave., Hartford, CT 06156; (860) 273-0123; www.aetna.com.

AETNA
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '11
1.40
vs.
1.00
- 1%
45.39
-
34.50
10 - 8
Jun '11
1.35
vs.
1.05
- 2%
46.01
-
36.10
11 - 9
Mar '11
1.43
vs.
0.98
- 3%
39.23
-
30.60
11 - 8
Dec '10
0.63
vs.
0.40
- 2%
32.41
-
29.54
9 - 9
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
34.25
3.68
0.04
35.96
-
25.00
10 - 7
2010
34.73
2.75
0.04
34.91
-
18.66
13 - 7
2009
30.95
3.93
0.04
59.80
-
14.21
15 - 4
2008
27.60
3.49
0.04
60.00
-
39.02
17 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
100
95
88
83
52
99
88

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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