WellPoint Downgraded to Neutral - Analyst Blog

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We have downgraded our recommendation on WellPoint Inc. ( WLP ) to Neutral from Outperform based on lack of momentum in the earnings outlook.

WellPoint reported third-quarter 2011 operating earnings of $1.77 per share, striding ahead of the Zacks Consensus Estimate of $1.69 per share. Results were also higher than $1.74 earned in the year-ago quarter.

WellPoint has been witnessing substantial earnings growth over the past few quarters, spurred by membership gains, improvements in operating cost structure, strategic acquisitions and capital transactions. Additionally, disciplined expense control in SG&A expenses has also helped its expense ratio to improve by 40 basis points (bps) year over year to 14.0% in the third quarter of 2011.

WellPoint's strong capital and cash position have also fueled cash dividends and stock repurchases. Besides, a stable operating performance, strong operating cash flow and solid statutory capital have also inspire confidence among the rating agencies.

In December 2011, A.M. Best also assigned a "bbb+" rating to WellPoint's senior unsecured debt, "bbb" to its subordinated debt and "bbb-" to the preferred stock, all of which were registered through the universal shelf registration process.

Moreover, WellPoint is a dominant player in its entire 14 Blue Cross and Blue Shield state markets, and its ability to access the provider networks of any other BCBS plan across the US further reinforces the company's competitive strength. Although membership is expected to be sluggish in the fourth quarter of 2011, management expects a number of new sales beginning 2012, which is encouraging.

However, on the negative side, WellPoint's debt-to-capital ratio has been increasing steadily. It surged from 25.3% in 2009 to 27.3% in 2010 and 29.7% at the end of the third quarter of 2011. Although the ratio is still within the targeted range of 25% to 35%, as indicated by the bank covenants, it stands higher than average for the health and managed care sector.

Moreover, the impact of the health care reform on health insurance premiums is uncertain and will vary significantly by market, due to the fact that the new and existing rules differ between the individual, small employer and large employer markets.

Though some provisions of the legislation became effective in 2010 and 2011, most provisions, such as annual fees on health insurance companies, excise tax on high premium insurance policies, guaranteed coverage requirements and the pre-requisite that individuals obtain coverage, will come into effect after 2014.

Going ahead, the provisions of the new law are likely to pressurize profits as WellPoint and other health insurers are tied to the ongoing weak demand for their products and services and uncertainties related to implementation of health insurance reforms.

WellPoint is the largest insurer on the basis of enrollment, beating competitors like Aetna Inc. ( AET ), CIGNA Corporation ( CI ) and UnitedHealth Group Inc. ( UNH ). Currently, the Zacks Consensus Estimate for WellPoint's fourth-quarter earnings stands at $1.11 per share, down about 16.5% year-over-year. For 2011, earnings are expected to be $7.08 per share, climbing about 5.1% year-over-year.

Currently, WellPoint carries a Zacks #3 Rank, which translates into a Hold rating for the near term.

AETNA INC-NEW ( AET ): Free Stock Analysis Report

CIGNA CORP ( CI ): Free Stock Analysis Report

UNITEDHEALTH GP ( UNH ): Free Stock Analysis Report

WELLPOINT INC ( WLP ): Free Stock Analysis Report

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

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

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