Aetna Continues to Walk on Growth Path In Spite of Risks

On Jan 7, we issued an updated research report on the U.S. health insurer Aetna Inc. (AET).

Aetna is among the top five health insurers in the U.S., with the first rank held by UnitedHealth Group Inc. (UNH) (as per market share). Regardless of facing significant business challenges and uncertainties in 2014, Aetna has delivered strong top- and bottom-line growth in 2014. The company’s average positive surprise over the past three reported quarters of 2014 was 15.1%.

Aetna has taken several measures, both organic as well as inorganic, to grow its business. These measures are expected to yield 2014 revenues of $57–$58 billion, up from $47.2 billion achieved in 2013. The company expects to generate $100 billion of operating revenues by the end of the decade and the growth will primarily come from retail marketplaces, public exchanges, medicare advantage, dual eligibles and Medicaid.

The insurer is also actively working on its ACO strategy, to manage medical cost. The health insurer also sees attractive business opportunity from private exchanges and expects $7.5 billion of premium from this line by 2018.

Aetna is well poised to grow its public exchange business. It enrolled nearly 600000 members across 17 exchanges in 2014 and expects to generate approximately 5% of 2014 expected operating revenues from public exchange business.

Other factors such as spreading international business and a strong capital position make Aetna a favored stock among investors. Over the last four years (2010–2014), Aetna’s total shareholders’ return has exceeded 2.4x the return of the S&P 500.

Nevertheless, hindrance to premium rate increases, medicare rate pressure and increasing medical cost are some of the headwinds facing the company over the next several quarters.

Aetna carries a Zacks Rank #3 (Hold). Better-ranked stocks from the industry include Centene Corp. (CNC) and Anthem, Inc. (ANTM). While Centene carries a Zacks Rank #1 (Strong Buy), Anthem carries a Zacks Rank #2 (Buy).