We retain our Neutral recommendation on
), following the second quarter earnings. Earnings marginally
lagged the Zacks Consensus Estimate but surpassed the year-ago
results on the back of improved top line, which was driven by
premium growth and higher Senior enrollment.
Counting on the positives, WellPoint has strengthened its portfolio
through the acquisition of Medicare specialist, CareMore Health
Group, in order to expand its presence in the U.S. government
program for the elderly. Additionally, WellPoint collaborated with
Health Care Service Corp. (HCSC) and Blue Cross Blue Shield of
Michigan (BCBSM), to purchase a stake in Bloom Health, a private
online health insurance exchange, in a bid to aggrandize its health
The company is striving towards diversifying its products. It is
also looking forward to adding new products and services to its
State Sponsored business post the acquisition of Amerigroup.
WellPoint expects this to strengthen its potential in the Medicaid
and other related emerging markets.
WellPoint has been witnessing substantial earnings growth over the
past few quarters, spurred by improvements in operating cost
structure, strategic acquisitions and capital transactions.
WellPoint's strong capital and cash position have also fueled cash
dividends and stock repurchases. While the company began cash
dividend payouts in early 2011, it has also engaged itself in
aggressive share buybacks for more than a year now and is
constantly utilizing its excess capital to retain investors'
On the flip side, the company has been witnessing increasing debt
to capital ratio. The ratio is also considerably higher than that
of its closest peers,
Unitedhealth Group, Inc.
) with a ratio of 27.52% and
) with 31.5%. Although the company's debt-to-capital ratio is still
within the targeted range of 25% to 35%, as indicated by the bank
covenants, it stands higher than the average of the health and
managed care sector.
Although WellPoint has an extensive membership base consisting of
almost 11% of the U.S. population, its membership has been
declining since 2008. Management expects it to further decline due
to the prevailing high unemployment levels and the impact of
certain strategic changes.
Delayed product approvals for new health care reform compliant
products are further affecting membership growth adversely.
Additionally, the in-group membership change is expected to remain
negative in 2012.
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Higher medical costs in the Senior, Local Group and State-Sponsored
businesses, lower favorable prior-year reserve development and the
impact of minimum medical loss ratio requirements in 2011 adversely
affected the benefit expense ratio. Benefit expense ratio in the
first quarter was 83.5%, and further worsened in the second quarter
to 85.4%. The ratio is expected to rise further by the end of 2012.
Increasing cost trends owing to the elevated use and cost of
specialty pharmaceuticals have induced WellPoint to reduce its
guidance for 2012.
Overall, we believe WellPoint has a substantial long-term growth
potential given its leading market share positions, diversified
product portfolio and strategic acquisitions.
WellPoint currently holds a Zacks #4 Rank (short term Sell rating)
for the company, indicating slight downward pressure on the stock
over the near term.