We are reiterating our Neutral recommendation on the shares of
) following the company's second-quarter earnings release. The
company's second quarter 2012 earnings came in at $1.31 per share,
beating the Zacks Consensus Estimate by 6 cents, though it declined
3% year over year.
Better-than-expected earnings were attributed to
higher revenue, higher underwriting margins and increased
membership in the company's Medicare business.
We expect Aetna to continue reporting earnings improvement going
forward. The company has made considerable investments in products
and technology, with an intention to extend its core health
business and capitalize on exciting new consumer and provider
opportunities, which are emerging in the marketplace. Aetna's
strong operating results and significant capital generation will
enable it to make further investments.
This health insurance giant is expected to continue performing
well in 2012 backed by the performance of its Medicaid and Medicare
segments, fast growing health services segment, along with an
expanding provider network and a strong balance sheet.
Aetna is aggressively expanding its reach in the Medicare
business. The lifting of the Centers for Medicare & Medicaid
Services (CMS) sanctions in June last year, and the acquisition of
Genworth's Medicare Supplement business have boosted its Medicare
platform. Aetna is focusing on developing solutions that help
retirees to manage their health and employers to manage expenses.
Both of these are growing challenges as baby boomers enter the
Aetna is also aiming at generating incremental fee revenues by
managing infrastructure required for care organizations.
With respect to Aetna's international business, the product
launches in China, earlier during the year, met with initial
success. 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
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 individuals. 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 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, membership growth, restriction on premium rate
increase, an increase in medical costs expected in 2012 and a low
interest rate environment are some of the headwinds, which the
company is facing at this moment.
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,
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