High Expenses Hit Coventry - Analyst Blog

By Zacks Equity Research,

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Coventry Health Care Inc. ( CVH ) generated fourth-quarter 2011 operating earnings per share of 58 cents, which lagged the Zacks Consensus Estimate of 64 cents as well as 96 cents reported in the year-ago quarter. Operating income amounted to $82.1 million, substantially lagging $142.1 million earned in the year-ago quarter.

The decline was primarily attributable to increased expenses coupled with membership decline in Commercial Group Risk and Medicare Part D that marred the desired upside in the top line. Revenue from management services also declined, contributing to the downside.

The earnings per share for the reported quarter exclude the favorable impact of 2 cents from the Medicare Advantage Private Fee-for-Service (MA-PFFS). Including the impact of the special items, Coventry reported net income of $85.7 million or 60 cents per share in the reported quarter, plunging from $150.3 million or $1.01 per share in the prior-year quarter.

Operating revenues in the reported quarter climbed 3.3% year over year to $3.13 billion, almost in line with the Zacks Consensus Estimate of $3.09 billion. Managed care premiums increased 4.0% year over year to $2.84 billion, while revenues from management services declined 2.5% to $287.2 million.
Coventry witnessed total operating expense growth of 6.8% year over year to $2.98 billion. Additionally, medical costs, the major operating expense component, increased to $2.33 billion from $2.16 billion in the prior-year quarter.
Likewise, Coventry's cost of sales and selling, general and administrative (SG&A) expenses also increased to $539.7 million from $531.4 million over the said period. However, depreciation and amortization (D&A) expenses declined marginally to $34.7 million from $36.3 million in the year-ago quarter.
Health Plan Commercial Group Risk: The Health Plan Commercial Risk membership for the reported quarter was 1,635,000, reflecting a decrease of 6,000 from the prior quarter. The Health Plan Commercial Group Risk Medical Risk Ratio ( MLR ) in the reported quarter came in at 83.7%.
Medicare Advantage Coordinated Care Plans (MA-CCP):
Coventry reported MA-CCP membership of 222,000, showing an increase of 2,000 members from the third quarter of 2011. The Medicare Advantage MLR came in at 82.3%.
Medicare Part D: Medicare Part D membership stood at 1,143,000 at the end of the reported quarter, declining 5,000 over the prior quarter. The Medicare Part D MLR in the quarter came in at 60.5%, against 64.7% in the prior-year quarter.
Medicaid: The Medicaid membership at the end of the reported quarter stood at 692,000, which reflected an increase of 224,000 members from 2010-end. The Medicaid MLR in the quarter came in at 94.4%.
Full-Year 2011 Highlights

For full-year 2011, Coventry reported operating income of $419.5 million or $2.87 per share against $546.4 million or $3.70 per share in 2010. However, earnings per share lagged the Zacks Consensus Estimate of $2.93. Reported net income came in at $543.1 million or $3.70 per share, against $438.6 million or $2.97 per share in 2010.

Coventry's operating revenue amounted to $12.2 billion in 2011, showing a modest year-over-year increase from $11.6 billion while marginally exceeding the Zacks Consensus Estimate of $12.17 billion. Additionally, total expenses increased to $11.3 billion from 10.9 billion.

Balance Sheet and Capital Structure
Coventry ended the reported quarter with approximately $1.58 billion of cash and cash equivalents, down from $1.85 billion at the end of 2010. The company exited 2011 with $1.58 billion in long-term debt, marginally down from $1.60 billion at 2010-end.

Operating cash outflow totaled $269.6 million at the end of the reported quarter.
As of December 31, 2011, Coventry had total assets of $8.81 billion and shareholders' equity of $4.51 billion. During the reported quarter, Coventry repurchased 3.2 million shares at an aggregate price of $100 million.

Outlook for 2012
Coventry expects its 2012 earnings per share to be between $3.10 and $3.30. Projections for risk revenue stand at $12.75-12.90 billion, while management services revenue is projected to lie between $1.11-1.15 billion.
The company also revealed its consolidated revenue guidance range of $13.86-14.05 billion. Coventry's consolidated MLR is expected between 83.1% and 83.9% in fiscal 2012.
Coventry also anticipates the cost of sales expense to lie in the range of $231-237 million, with SG&A expenses in the range of $2.13-2.16 billion, D&A between $136-140 million and interest expense in the range of $98.0-99.0 million in fiscal 2012.
Coventry's other income is also projected to range between $77 million and $83 million, while tax rate is estimated to be in the 36.7-37.3% range. Shares outstanding at year end are expected to be in the range of 138-142 million.
Peer Take
Coventry's competitor, WellPoint Inc. ( WLP ) reported its fourth-quarter 2011 adjusted income of 99 cents per share, lagging the Zacks Consensus Estimate of $1.11 per share. Results were also 25.6% lower than $1.33 per share earned in the year-ago quarter.

Also, another peer, Unitedhealth Group Inc. ( UNH ), declared its fourth-quarter 2011 earnings of $1.17 per share, substantially higher than the Zacks Consensus Estimate of $1.02.
Coventry carries a Zacks #3 Rank, which translates into a short-term Hold rating.

COVENTRY HLTHCR ( CVH ): Free Stock Analysis Report
UNITEDHEALTH GP ( UNH ): Free Stock Analysis Report
WELLPOINT INC ( WLP ): Free Stock Analysis Report
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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: CVH , MLR , UNH , WLP

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