We are upgrading our recommendation on WellPoint Inc. (WLP) to ‘Outperform’ from ‘Neutral’ based on its ability to generate higher premiums and control cost, which enhances operational efficiencies and supports the desired upside in the stock.
In addition, WellPoint has the exclusive right to market products under Blue Cross Blue Shield Association, the most recognized brand in the industry, while it is a dominant player in its entire 14 Blue Cross and Blue Shield state markets with over 34 million members. Therefore, the company is well positioned to benefit from economies of scale and favorable demographic trends.
Additionally, WellPoint has been strengthening its portfolio through acquisition of its privately held Medicare specialist, CareMore Health Group, in order to expand its presence in the U.S. government program for the elderly. Upon the expected completion of the acquisition by the end of 2011, the deal is expected to break-even in 2012 and be accretive to earnings from 2013 onwards.
Furthermore, WellPoint’s strong capital and cash position have also pushed up cash dividends and stock repurchases. Sale of redundant assets have also strengthened the balance sheet and operating cash flow position, thereby expanding operational efficiencies and scope for growth in the future.
The risks associated with WellPoint include the negative impact of the healthcare reform on the health insurance premiums, which again weighs on the top line, coupled with higher medical costs, which are expected to rise in 2011. Another risk is its increasing debt-to-capital ratio, which could gravely impact its financial leverage should the company raise more debt to fund the CareMore acquisition.
Nonetheless, with its leading market share position, diversified product portfolio and consistency, WellPoint has a strong growth potential to beat arch rivals such as Humana Inc. (HUM), UnitedHealth Group Inc. (UNH) and Aetna Inc. (AET) in the long-term.
Earnings Overview
WellPoint has been witnessing substantial earnings growth over the past few quarters, spurred by membership gains, improvements in operating cost structure, strategic acquisitions and capital transactions.
The company’s first quarter operating earnings per share of $2.35 surpassed the Zacks Consensus Estimate of $1.87 and last year's $1.95. The substantial elevation spurred from membership growth and the decline in SG&A expenses, along with the company’s effort to lower the rate of rising health care costs. However, revenues dipped primarily due to the conversion of the large municipal group to a self-funded arrangement during 2010.
Factoring these aspects, the Zacks Consensus Estimate for the second quarter of 2011 is expected to be $1.79 per share, up about 7% year over year. For full year 2011, operating earnings are expected to climb by 6% year over year to $7.09 per share. Additionally, the company has a quantitative Zacks #2 Rank, indicating slight upward pressure on the shares over the near term.
WellPoint is scheduled to release its second quarter earnings before the market opens on July 27, 2011.
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