We maintain a Neutral recommendation on
Coventry Health Care Inc.
) based on its operating efficiencies, top-line growth, upbeat 2012
earnings guidance, stable ratings and cost-containment efforts.
Increased expenses and membership decline in the Commercial Group
Risk segment are the downsides.
Coventry reported first-quarter 2012 operating earnings per
share of 62 cents, which lagged the Zacks Consensus Estimate by a
penny and was also lower than the prior-year earnings of 66 cents.
Operating income amounted to $88.3 million in the reported
Coventry's capital position and investments in technology and
medical management supports its long-term goals. The company is
also improving its operating efficiencies, largely through
economies of scale.
Moreover, Coventry possesses a strong balance sheet with about
$900 million in deployable cash at the end of the first quarter of
2012, which facilitated initiation of a quarterly dividend in March
2012. With no debt repayment scheduled in the next couple of years,
the company has ample scope for strategic acquisitions as well as
share repurchases and dividend payouts.
Coventry's operating efficiency, geographic diversification,
widespread product portfolio and a strong financial position help
retain the confidence of rating agencies. Consequently, in May
2012, A.M. Best affirmed the issuer credit rating of the company at
'bbb-.' The rating agency also reiterated the debt ratings of the
company along with a stable outlook on all these ratings,
indicating low possibility of any rating change in the near
However, the operating cash flow of Coventry fluctuates
substantially from quarter to quarter, which may affect normal
operations of the company. Annual cash flows from operations also
vary substantially. Going ahead, such instability could weigh
heavily on the capital and financial leverage, thereby risking the
company's investment and growth targets.
Moreover, high competition limits Coventry's ability to increase
premium rates under the threat of losing out prospective members to
competitors such as
Health Net Inc.
). The company has to compete with other managed care companies
that have broader geographical coverage, more established
reputations, greater market share, larger contracting scale, lower
costs and greater financial and other resources. Such competition
from bigger players will negatively impact Coventry's
Coventry currently carries a Zacks #3 Rank, which translates
into a short-term Hold rating.
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