We are downgrading our recommendation on the shares of
Aetna Inc.
(
AET
) following the soft first quarter 2012 results. Reported quarter
earnings missed the Zacks Consensus Estimate by 6 cents per share.
Earnings also declined 6.3% year over year. Despite the increase in
revenues, growth did not trickle down to the bottom-line results
due to higher health care costs and operating expenses.
Though Aetna's earnings fell short of the Zacks Consensus
Estimate, we expect it to record top-line growth going further. The
company has made considerable investments in products and
technology, with an intention to extend its core health business
and capitalize on new consumer and provider opportunities emerging
in the marketplace.
Aetna's strong operating results and significant capital
generation will enable it to make further investments. We expect
the company to continue performing well in 2012 backed by the
performance of the Medicaid and Medicare segments, fast growing
health services segment and a strong balance sheet.
Aetna is also looking to generate incremental fee revenues by
managing the infrastructure necessary for care organizations.
With respect to Aetna's international business, the product
launches in China, earlier during the year, have been sucessful.
The company also entered the Indian market with the acquisition of
the Indian Health Organization. These are indicative of Aetna's
efforts to expand its global footprint and develop new business
models.
Aetna has made a number of acquisitions in its Commercial
business such as Prodigy. Prodigy's highly-customized offering
addresses a portion of the self-funded market, covering
approximately 27 million lives. Additionally, the company also
acquired PayFlex, an administrator of Flexible Spending Accounts
(FSAs), Health Savings Accounts (HSAs) and other accounts that
support consumer-based health plan designs.
Aetna's balance sheet is quite strong with a moderate leverage.
Its excess cash generation in 2011 enabled it to complete four
significant acquisitions, repurchase 45 million shares and
institute a meaningful shareholder dividend.
However, uncertainties surrounding the final outcome of the
Health Care Reform, higher expected utilization in 2012 and a low
interest rate environment are some of the headwinds faced by the
company.
Aetna currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Some of its peers within our coverage, who
also retain a Zacks #3 Rank and a long-term Neutral recommendation,
include
CIGNA Corp.
(
CI
) ,
WellPoint Inc
. (
WLP
),
Humana Inc
. (
HUM
) and
CVS Caremark Corp.
(
CVS
).
AETNA INC-NEW (AET): Free Stock Analysis Report
CIGNA CORP (CI): Free Stock Analysis Report
CVS CAREMARK CP (CVS): Free Stock Analysis
Report
HUMANA INC NEW (HUM): Free Stock Analysis
Report
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