Aetna Embraces, Opportunity, Profit

2/9/2015


  Recent Price
$96
  Dividend
$1.00
  Yield
1.0%
  P/E Ratio
14
  Shares (millions)
355
  Long-Term Debt as % of Capital
34%
  52-Week Price Range
$96.25 - $64.68

Nobody can say Aetna ($96; AET) fears change.

When the Affordable Care Act (ACA) changed the face of managed care, Aetna didn't test the water — it just dove in. Last year, the company participated in 17 states' public exchanges for individual coverage, more than any of its largest competitors. Not coincidentally, Aetna's membership rose 6% to 23.5 million insured by the end of 2014. While the acquisition of Coventry in May 2013 contributed to the growth, Aetna's embrace of health-care exchanges deserves much of the credit (560,000 new members across the 17 exchanges).

In the December quarter, Aetna earned $1.22 per share excluding special items, down 16% but in line with the consensus on better-than-expected 12% revenue growth. The medical-benefit ratio (health-care costs as a percentage of premiums) improved to 83.0% in the quarter from 83.9% a year earlier

Aetna, yielding 1.0%, is a Focus List Buy and a Long-Term Buy. 

Looking forward

Aetna has provided ample reasons to get excited about the year ahead:

• The company boosted its 2015 profit estimate and now projects more than $7.00 per share. That target is below expectations, but so was the target of at least $6.90 per share provided in December, and the consensus rose in the wake of the earlier announcement. Aetna's goals of at least $80 billion in revenue and $10 per share in profits by 2018 equate to annualized growth of 8% in sales and 11% in profits over the next four years.

• Aetna raised the minimum wage for its workers to $16 per hour, a move that could boost payroll by $14 million this year but also could reduce turnover costs, as well as improve its standing with the public.

• The company said demand for ACA plans spiked in December as the renewal deadline approached, and also predicted that membership in both ACA and Medicare Advantage plans would increase more than expected in the March 2015 quarter.

ACA trends stand to benefit the entire managed-care industry. While the industry's year-ahead prospects as a group look good, Aetna compares favorably to its peers in several ways:

1) Value: Aetna's Quadrix Value score of 75 is tops among the managed-care companies in the S&P 1500 Index. At 14 times trailing earnings, the shares trade at a 35% discount to the industry average.

2) Fundamentals: While managed-care stocks average a solid Overall score of 72, Aetna stands out from the crowd with a 93.

3) Profitability: Aetna's operating margin of 7.6% last year reflects strategic price increases that helped offset the new fees and taxes that accompanied health reform. Aetna's rivals averaged lower margins (5.5%) and larger year-to-year declines.

Conclusion

Over the last five years, Aetna has shrunk its share count by 20%, spending more than $7 billion on buybacks. The company's operating cash flow jumped 48% last year, and we expect continued aggressive repurchases.

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
Dec '14
1.22
vs.
1.45
12%
91.87
-
71.81
13 - 10
Sep '14
1.79
vs.
1.61
13%
85.72
-
74.81
13 - 11
Jun '14
1.69
vs.
1.62
26%
82.70
-
66.85
12 - 10
Mar '14
1.98
vs.
1.56
47%
76.71
-
64.68
12 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Est.
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
57.92
6.70
0.90
91.87
-
64.68
14 - 10
2013
47.28
5.85
0.80
69.47
-
44.38
12 - 8
2012
36.60
5.13
0.70
51.14
-
34.58
10 - 7
2011
33.78
5.17
0.45
46.01
-
30.60
9 - 6
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
93
60
75
83
37
87
84

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


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