Coventry Health Care Inc. (CVH) generated third-quarter 2011 operating earnings of 82 cents per share, which came in line with the Zacks Consensus Estimate but substantially lagged behind $1.29 per share reported in the year-ago quarter. The decline was primarily attributable to increased expenses coupled with tepid membership growth that marred the desired upside in the top line. These were partially offset by lower tax provisions.
The earnings per share for the reported quarter exclude the favorable impact of 2 cents from the Medicare Advantage Private Fee-for-Service (MA-PFFS). Including the impact of the special items, Coventry reported net income of $122.7million or 84 cents per share in the reported quarter, plunging from $189.9 million or $1.29 per share in the prior-year quarter.
Total operating revenues in the reported quarter climbed 4.9% year over year to $2.98 billion, though failed to match the Zacks Consensus Estimate of $3.05 billion. Managed care premiums increased 5.4% year over year to $2.68 billion, while revenues from management services inched up 1% to $295.5 million.
Coventry witnessed total operating expense growth of 9.4% year over year to $2.78 billion. Medical costs, the major operating expense component, increased to $2.19 billion from $1.96 billion in the prior-year quarter.
Likewise, Coventry’s cost of sales and selling, general and administrative (SG&A) expenses also increased over the said period. However, depreciation and amortization (D&A) expenses declined marginally to $33.0 million from $34.8 million.
Health Plan Commercial Group Risk: The Health Plan Commercial Risk membership for the reported quarter was 1,636,000, an increase of 103,000 from the prior-year quarter. The Health Plan Commercial Group Risk Medical Risk Ratio (MLR) in the quarter came in at 82.5%.
Medicare Advantage Coordinated Care Plans (MA-CCP): Coventry reported MA-CCP membership of 220,000, showing an increase of 27,000 members from the year-ago quarter. The Medicare Advantage MLR came in at 82.0%.
Medicare Part D: Medicare Part D membership stood at 1,148,000 at the end of the reported quarter, staying almost flat year over year. The Medicare Part D MLR in the quarter came in at 76.8%, against 79.0% in the prior-year quarter.
Medicaid: The Medicaid membership at the end of the reported quarter stood at 467,000, which reflected an increase of 5,000 members from the year-ago quarter. The Medicaid MLR in the quarter came in at 88.1%.
Balance Sheet and Capital Structure
Coventry ended the reported quarter with approximately $1.99 billion of cash and cash equivalents, up from $1.85 billion at the end of 2010. The company exited the quarter with $1.58 billion in long-term debt, marginally down from $1.60 billion at 2010-end.
Debt to capital ratio stood at 28.7% against 28.3% in the year-ago quarter. Operating cash flow totaled $484.2 million at the end of the reported quarter.
As of September 30, 2011, Coventry had total assets of $9.02 billion and shareholders’ equity of $4.51 billion. In addition, the company repurchased 4.3 million shares for $127.5 million, buying back a total of 7.4 million shares for $277.7 million so far in 2011.
Outlook for 2011
Concurrently, management revised its earnings outlook for 2011. Coventry now raised its GAAP earnings expectation to be between $3.63 and $3.68 per share. This includes the impact of adjustments from litigation settlement of 68 cents, partially offset by favourable impact of MA-PFFS by 13 cents per share.
Projections for risk revenue have been revised to $10.90–10.98 billion. Management services revenue is projected between $1.18 billion and $1.195 billion.
The company raised its consolidated revenue guidance to the range of $12.08–12.175 billion. Coventry’s consolidated MLR is now expected between 82.0% and 82.4% in fiscal 2011.
Coventry also raised the cost of sales projection in the range of $277–281 million, with SG&A expenses in the range of $2.01–2.03 billion, D&A between $135 million and $137 million, and interest expense reiterated in the range of $98.0 million to $99.0 million in fiscal 2011.
Coventry’s other income is also raised to range between $83 million and $85 million, while tax rate is estimated in 35.5–36.5% range. Shares outstanding at year end are expected to be in the range of 146.5 million to 147.5 million.
Peer Take
On Wednesday, a competitor of Coventry, WellPoint Inc. (WLP) reported third-quarter 2011 operating earnings of $1.77 per share, striding ahead of the Zacks Consensus Estimate of $1.69 per share and $1.74 per share earned in the year-ago quarter on lower share count. However, operating net income declined 9.2% year over year to $636.4 million.
Another peer, Unitedhealth Group Inc. (UNH) reported third quarter 2011 earnings of $1.17 per share, higher than the Zacks Consensus Estimate of $1.12. Earnings also compared favorably with $1.14 reported in the prior-year quarter.
Coventry carries a Zacks #3 Rank, which translates into a short-term Hold rating.
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