We are maintaining our Neutral recommendation on
Coventry Health Care Inc.
(
CVH
) based on its improving operating efficiencies, strong 2012
earnings guidance and sturdy capital position.
Coventry 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.
Improved sales and the retention process implemented since 2009
has transformed Coventry's Commercial Risk business into a success.
The business shrank about 10% in 2009, hurt by the increase in
national unemployment. However, it has now become an important
source of revenue and contributed almost half of the total
operating revenues of Coventry in 2011.
Moreover, the company has a strong balance sheet, which
facilitates growth through acquisitions. Coventry acquired Family
Health Partners from Children's Mercy in January 2012, which
boosted its Medicaid membership by 210,000 in the combined Kansas
and Missouri markets. Moreover, the acquisition is expected to have
a modest positive effect on the company's earnings in 2012.
Further, substantial cash balance and the absence of any debt
repayment obligations in the near term allow Coventry to regularly
return value to shareholders through share repurchases. The company
also initiated a quarterly dividend recently, spurred by the
presence of $900 million of deployable cash.
However, the highly competitive environment limits Coventry's
ability to increase premium rates in the fear of losing out
prospective policyholders to competitors such as
WellPoint Inc.
(
WLP
),
Humana Inc.
(
HUM
) and
Health Net Inc.
(
HNT
). Additionally, the company has to compete with other managed care
companies, which have broader geographical coverage, more
established reputations, greater market share, larger contracting
scale, lower costs and greater financial and other resources.
Moreover, the provisions of the Health Care Reform Act are
likely to impact Coventry's bottom line and the viability of
certain Medicare Advantage plans. The company's annual core
earnings have also been largely affected by the implementation of
minimum medical loss ratio (
MLR
) regulation. The MLR mandate led to MLR degradation of 270 basis
points for Medicare Advantage and Medicaid products in 2011.
However, we believe that the company's fundamentals and
cost-containment efforts will enhance its long-term growth
potential. The Zacks Consensus Estimate for the company's
first-quarter 2012 earnings is currently 61 cents per share,
down about 7.5% year over year. For full-year 2012, the Zacks
Consensus Estimate stands at $3.25 per share, up 13.2% over
2011.
Coventry currently carries a Zacks #3 Rank, which translates
into a short-term 'Hold' rating.
COVENTRY HLTHCR (
CVH
): Free Stock Analysis Report
HEALTH NET INC (
HNT
): Free Stock Analysis Report
HUMANA INC NEW (
HUM
): Free Stock Analysis Report
WELLPOINT INC (
WLP
): Free Stock Analysis Report
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