Will Medicare Part D Drag Torchmark (TMK) Q4 Earnings?

Life and health insurer Torchmark Corp. (TMK) is scheduled to report fourth-quarter and full-year 2014 results after the market close on Feb 2.

In the last quarter, this company delivered a 2.94% negative earnings surprise. The average beat for the trailing four quarters is -0.73%.

Will Torchmark again miss the earnings estimates this quarter? Let’s see how things are shaping up at Torchmark prior to this announcement.

Factors Likely to Influence Q4 Results

Torchmark earnings will see a drag primarily from its Medicare Part D operations. Underwriting income in the segment will be affected by claims paid on a more costly hepatitis drug that was not priced in its Medicare Part D product offering. Moreover, the reimbursement process from CMS (for the claims tied to the hepatitis drug) will delay cash flow and lower investment income.

Nevertheless, this will be partly offset by higher top-line growth expected in the company’s life insurance segment coming primarily from its selling agencies – American Income and Global Life.

During the third quarter earnings release, the company reduced its 2014 earnings guidance to the range of $4.00 to $4.04 per share from the earlier expectation of $4.05 to $4.15 per share.

Earnings Whispers

Our proven model does not conclusively show that Torchmark is likely to beat the Zacks Consensus Estimate in the fourth quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) for this to happen. But this is not the case here as elaborated below.

Zacks ESP: Torchmark’s Most Accurate estimate is pegged at $1.00 per share, which is in line the Zacks Consensus Estimate. The Earnings ESP is thus 0.00%.

Zacks Rank: Torchmark has a Zacks Rank #4 (Sell), which when combined with a zero ESP makes surprise prediction difficult.

We caution particularly against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum

Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Centene Corp. (CNC) with Earnings ESP of +1.77% and a Zacks Rank #1.

Humana Inc. (HUM) with Earnings ESP of +0.86% and a Zacks Rank #2.

Assurant Inc. (AIZ) with Earnings ESP of +2.99% and Zacks Rank #3.