Aetna Underplays Its Strong Position

11/5/2012


  Recent Price
$44
  Dividend
$0.70
  Yield
1.6%
  P/E Ratio
9
  Shares (millions)
339
  Long-Term Debt as % of Capital
31%
  52-Week Price Range
$51.14 - $34.58

While Aetna ($44; AET) seems unmoved by its own good news, investors can feel free to get excited.

The managed-care provider earned $1.55 per share from operations in the September quarter, up 11%, eclipsing the consensus by $0.21. Revenue grew 5% to $8.92 billion, largely on higher premiums.

Despite the big profit surprise, Aetna barely touched its full-year guidance, now projecting $5.10 per share versus the prior target of $5.00 to $5.10. Known for its conservative projections, Aetna is a Buy and a Long-Term Buy.

Looking ahead

Aetna's full-year profit target implies earnings of $0.92 per share in the December quarter, below analyst estimates. Aetna attributed its view to fewer stock repurchases for the quarter and higher operating expenses as it prepares for the Affordable Care Act.

The company also anticipates higher medical expenses as more Americans schedule elective surgeries and exams postponed during the recession. So far, utilization of health-care services remains modest, though it continues to climb from historically low levels. To counter rising demand for medical services, Aetna increased prices earlier this year.

Health reform notwithstanding, Aetna seems well-positioned for long term growth.  And at less than nine times trailing earnings, shares trade 11% below their five-year average and 14% below the industry median.

Readying for reform

Aetna offers medical insurance to 18.2 million members, covering another 13.6 million under its dental plans and 8.8 million via pharmacy-benefit management. Membership for all three groups has held fairly flat over the last year.

Health-care reform could add 30 million new patients nationwide, with Medicaid plans projected to swell by 17 million, though some states have vowed to reject the expansion. Medicaid generates just 5% of Aetna's health-care revenue.

To grab a larger piece of that growth, Aetna agreed in August to acquire Coventry Health Care ($44; CVH) for $7.3 billion. About 52% of Coventry's 5.3 million members use government programs. Coventry will boost Aetna's Medicaid membership by more than 70%, Medicare Advantage by more than 50%, and commercial by more than 15%.

Until Coventry shareholders vote on the proposed deal Nov. 21, Aetna must suspend its aggressive stock-repurchase plan, which shaved 10% from the share count in the past year. Since March 2004, Aetna has reduced its share count by 47%.

Conclusion

Management will present its 2013 outlook Dec. 12. Preparations for the impending reform could weigh on profitability, and Aetna expects health-care usage to trend higher next year. But share repurchases and growth in the Medicare and Medicaid businesses should boost results. The commercial business plans to maintain profit margins rather than chase market share, likely causing membership to decline. 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 '12
1.55
vs.
1.40
+ 5%
40.94
-
34.58
8 - 7
Jun '12
1.31
vs.
1.35
+ 6%
50.47
-
38.52
10 - 8
Mar '12
1.34
vs.
1.43
+ 6%
51.14
-
41.05
10 - 8
Dec '11
0.97
vs.
0.63
0%
43.89
-
33.42
9 - 7
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
33.78
5.17
0.45
46.01
-
30.60
9 - 6
2010
34.25
3.68
0.04
35.96
-
25.00
10 - 7
2009
34.73
2.75
0.04
34.91
-
18.66
13 - 7
2008
30.95
3.93
0.04
59.80
-
14.21
15 - 4
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
89
44
91
83
52
55
57

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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