Monday, July 19, 2010
Medical cost spikes may cause health insurer pain : Lewis Krauskopf
| Any worker in the United States who fears he may lose his job might feel compelled to take an extra visit to the doctor or have a final dental checkup because his health coverage is about to vanish. For U.S. health insurers, this could spell financial trouble. Signs emerged last week that U.S. health insurers already hurt by lower membership because of the weak economy may face more fallout from the recession: higher medical costs. Aetna Inc , the No. 3 U.S. health insurer, rattled investors on Wednesday when it reported higher-than-projected medical costs for its first quarter, and blamed the economy. In another ominous sign, a survey released on Thursday by consulting company Mercer found employers raised estimates for 2009 health benefit costs because of the recession. On top of people using medical services because they worry about getting laid off, greater numbers may flock to Cobra post-employment health coverage and use more health services. While some analysts and investors believe Aetna's results were an anomaly - indeed, no other major HMO reported such a cost spike this quarter - they may signal rising medical costs for the entire industry, which could bite into profits. "It definitely raises the concern," Leerink Swann analyst Jason Gurda said. "There's a lot of similarities between these companies and if one is seeing a particular trend, it's very likely that the other companies are seeing it as well." Surprisingly high medical costs would provide another reason to keep a lid on health-insurer stocks, which have yet to rebound after profit warnings last year. Fears about the financial impact of potential health reform measures keep investors uncertain about the companies' prospects. The S&P Managed Health Care index of the six largest health insurers trades at a lowly 6.7 times this year's earnings estimates, compared with 13.4 times for the broader S&P 500 index. A spike in economy-related costs may also counter what some analysts had hoped would benefit insurers in the recession. One theory has been that medical costs would fall because cost-sensitive consumers would cut back on medical services as they face hard times - a position reflected, for example, by weak sales cited by some drugmakers this quarter. "It definitely is a big headwind for companies that did not expect it going into this year," Gurda said. Mercer's survey of 428 employers taken in March found they expect a 7.4 percent rise in health benefit costs this year, after last summer expecting a 6 percent rise for 2009. Fifteen percent of respondents already have experienced higher utilization of medical services than expected this year. "Why employers are now revising their cost increase upward is increased utilization," said Beth Umland, Mercer's director of research for health benefits. "That's very much a function of concerns about layoffs and more people on Cobra." Workers anticipating layoffs may get tests, exams or even elective surgeries they have been putting off, Umland said. "There is definitely a stockpiling mentality that comes into play when your coverage is tied to your employment and you're worried about your employment," Umland said. Because Cobra insurance is more expensive, people who buy the coverage tend to use it - making them much higher-cost members for health insurers. Aetna said about 2 percent of its members generally are in Cobra, but it believes the amount rose in the fourth quarter and into the first, driving up its overall medical costs. The economic stimulus package also includes Cobra subsidies that are expected to lead to more people to choose Cobra. Aetna Chief Financial Officer Joseph Zubretsky said in an interview last week the company previously had yet to conclude if the economy would lower medical costs or increase them. "Clearly, now we see that it's more the latter than the former," Zubretsky said. Some doubt cost spikes are about to hit industry earnings. Even if the recession is driving up costs, many analysts say other companies, like WellPoint Inc and UnitedHealth Group Inc , have been conservative and included that possibility in their 2009 forecasts for profits and medical cost increases. Put another way, a spike in costs poses a problem only if the insurers did not account for it in their pricing. Aetna also needed to dip into reserves to cover medical costs from prior periods, hurting earnings for the quarter. WellPoint and UnitedHealth, the two largest health insurers, suffered earnings setbacks last year that lead them to strengthen reserves, while Aetna did not endure such a setback in 2008. "Other companies were more reserved because they just blew up last year," Stifel Nicolaus analyst Thomas Carroll said. "When you have an underwriting problem like WellPoint did in March of last year, the first thing you do is fatten up your reserves." The question may be whether Aetna is now about to face the problems its rivals encountered, or whether it is ahead of the curve in pointing to a worrisome industry trend. "The issue here is: Did the others account for it relative to how they viewed pricing for 2009?" said David Heupel, a portfolio manager with Thrivent Investment Management. "You're going to have to see another quarter or so before it plays out. |
Sunday, July 18, 2010
A Financial Analysis of WellPoint Inc
Hedging your bets is one of the most underrated clichés when it comes to investing. Many investors try to find penny stocks that can accumulate double and triple gains in a short period of time. However, these stocks have a high propensity of failing. In order to prevent any dramatic negative change in share price, it is wise to have a large-cap value equity in your portfolio. One of these recommended companies would be WellPoint Inc (WLP). The 48.5 billion dollar equity is one of many large-cap stocks in the Health Care Plan industry. Many investors claim that companies like UnitedHealth Group or CIGNA may be better purchases, because of name recognition. However, after reviewing WellPoint's fundamental and strategic background, it is assured that this company will outperform its relative competitors.
WellPoint's business plan is the first reason why it is a great purchase. According to Reuters, WellPoint, "a commercial health benefits company serving approximately 34 million medical members." Although the corporation is located in Indiana, the company and its subsidiaries can be found across the United States through its licensed program Blue Cross and Blue Shield and its other program UniCare. As the population continues to age and baby boomers continue to retire, there will be an immense amount of demand for medical plans. Throughout the past two years many of the industry leaders have reaped the benefits from this situation, and the positive news will continue well into the next decade. UnitedHealth Group has grown 20% in terms of share price and WellPoint has grown 30% during the same time period of two years. Some investors may advocate taking some profit off the market, but with the future looking extremely bright for this industry--especially for large, well defined equities--there should be no reason to avoid giving heed to WellPoint.
Nevertheless, another argument may be made that WellPoint has the same business plan as all of the other competitors in its industries. This statement is true, but what really distinguishes WellPoint from similar market leaders like UnitedHealth Group, CIGNA, and Aetna is the fundamental background. Looking at the top line, WellPoint over the past year, quarter-by-quarter has seen growth over 28.9%. UnitedHealth's same statistic is only 8.3%, CIGNA's number is staggeringly low at 0.3%, and Aetna's figure is not available from the source of Capital IQ. This number has transcended to a 90.5 revenue share for WellPoint, easily beating out UnitedHealth and Aetna. Going down the income statement to the bottom line, WellPoint has seen net income grow year over year, quarterly at 22.9%. UnitedHealth has only seen a 4% same-figure growth, and CIGNA is only at a mellow 10.5% growth rate. WellPoint has not only seen the benefits of its earnings and revenue in its accounting statements, but relative to its price as well. As the company currently trades at 79.20, its forward P/E ratio of 12.4 makes the company undervalued compared to the industry's 17 multiple average. This number is also below UnitedHealth's 13.6 multiple, CIGNA's 12.8, and Aetna's 12.8 ratio as well. This company is undervalued from the most famous valuation technique and also undervalued from more profound multiples. Even with an enterprise value higher than its market capitalization, WellPoint's other ratios still are outstanding. The company currently holds a price to sales ratio of 0.85. None of the other aforementioned companies can compete with this number, because they all have the same statistic above 0.90. In reference to enterprise value to revenue and enterprise value to EBITDA, WellPoint's respective numbers of 0.88 and 8.5 are also below or very similar to UnitedHealth and CIGNA and only marginally higher to Aetna's respective figures. However, Aetna is trading a 50% increase of enterprise value to market cap, while WellPoint is trading at a 4% deficit, and the numbers are much more comparable than seen at first glance. Therefore, with the given statistics, there is definite evidence to support that WellPoint is undervalued.
However, there may be some question about WellPoint's high enterprise value. Nevertheless, much of this can be attributed to the recent entry to the public markets, allowing for more debt to be accumulated. Its 0.78 current ratio is low compared to competitors, but its total debt to equity is quite low at 0.28 for the industry, and this number even beats out the same figure of UnitedHealth and CIGNA. Another question may be directed at WellPoint's lower-than-industry average ROE of 12.5%. The industry has an average of about 17% and each of the aforementioned corporations has a number greater than WellPoint. Many investors may blame the management team led by CEO and President Angela Braly. Even more concern can be made because of the recent acquisitions WellPoint made of Lumenos and WellChoice, and how these purchases will lead to more revenue potential. Nevertheless, once again, the company is still fairly new and will need some time to produce equity returns similar to that of UnitedHealth or CIGNA. WellPoint currently has an ROA and ROI both close to the industry average, and should have no problem raising its ROE to a similar market position in the next few years. Currently, WellPoint needs to focus on growing its sales and cutting costs so it can earn the respect of more institutional investors. However, the company is doing so and should continue to see high operating margin growth as it has seen in the past three fiscal years.
Therefore, WellPoint is simply undervalued compared to the rest of its competitors. In addition, the company has great growth potential as well. The same may be said about all the corporations in this industry, but WellPoint's PEG, with growth estimated for the next five years, is not only below the magic number of one, but below both CIGNA and UnitedHealth's respective numbers. The company does not offer dividends to entice investors, but it is currently trading below its 50 day SMA and investing in the stock now will reap even more benefits than a few months or years from today. There is no argument that medical plans will always be in demand. But demand will be outrageous five to ten years from today, and now is the perfect opportunity to use this foresight for your financial benefit.
WellPoint's business plan is the first reason why it is a great purchase. According to Reuters, WellPoint, "a commercial health benefits company serving approximately 34 million medical members." Although the corporation is located in Indiana, the company and its subsidiaries can be found across the United States through its licensed program Blue Cross and Blue Shield and its other program UniCare. As the population continues to age and baby boomers continue to retire, there will be an immense amount of demand for medical plans. Throughout the past two years many of the industry leaders have reaped the benefits from this situation, and the positive news will continue well into the next decade. UnitedHealth Group has grown 20% in terms of share price and WellPoint has grown 30% during the same time period of two years. Some investors may advocate taking some profit off the market, but with the future looking extremely bright for this industry--especially for large, well defined equities--there should be no reason to avoid giving heed to WellPoint.
Nevertheless, another argument may be made that WellPoint has the same business plan as all of the other competitors in its industries. This statement is true, but what really distinguishes WellPoint from similar market leaders like UnitedHealth Group, CIGNA, and Aetna is the fundamental background. Looking at the top line, WellPoint over the past year, quarter-by-quarter has seen growth over 28.9%. UnitedHealth's same statistic is only 8.3%, CIGNA's number is staggeringly low at 0.3%, and Aetna's figure is not available from the source of Capital IQ. This number has transcended to a 90.5 revenue share for WellPoint, easily beating out UnitedHealth and Aetna. Going down the income statement to the bottom line, WellPoint has seen net income grow year over year, quarterly at 22.9%. UnitedHealth has only seen a 4% same-figure growth, and CIGNA is only at a mellow 10.5% growth rate. WellPoint has not only seen the benefits of its earnings and revenue in its accounting statements, but relative to its price as well. As the company currently trades at 79.20, its forward P/E ratio of 12.4 makes the company undervalued compared to the industry's 17 multiple average. This number is also below UnitedHealth's 13.6 multiple, CIGNA's 12.8, and Aetna's 12.8 ratio as well. This company is undervalued from the most famous valuation technique and also undervalued from more profound multiples. Even with an enterprise value higher than its market capitalization, WellPoint's other ratios still are outstanding. The company currently holds a price to sales ratio of 0.85. None of the other aforementioned companies can compete with this number, because they all have the same statistic above 0.90. In reference to enterprise value to revenue and enterprise value to EBITDA, WellPoint's respective numbers of 0.88 and 8.5 are also below or very similar to UnitedHealth and CIGNA and only marginally higher to Aetna's respective figures. However, Aetna is trading a 50% increase of enterprise value to market cap, while WellPoint is trading at a 4% deficit, and the numbers are much more comparable than seen at first glance. Therefore, with the given statistics, there is definite evidence to support that WellPoint is undervalued.
However, there may be some question about WellPoint's high enterprise value. Nevertheless, much of this can be attributed to the recent entry to the public markets, allowing for more debt to be accumulated. Its 0.78 current ratio is low compared to competitors, but its total debt to equity is quite low at 0.28 for the industry, and this number even beats out the same figure of UnitedHealth and CIGNA. Another question may be directed at WellPoint's lower-than-industry average ROE of 12.5%. The industry has an average of about 17% and each of the aforementioned corporations has a number greater than WellPoint. Many investors may blame the management team led by CEO and President Angela Braly. Even more concern can be made because of the recent acquisitions WellPoint made of Lumenos and WellChoice, and how these purchases will lead to more revenue potential. Nevertheless, once again, the company is still fairly new and will need some time to produce equity returns similar to that of UnitedHealth or CIGNA. WellPoint currently has an ROA and ROI both close to the industry average, and should have no problem raising its ROE to a similar market position in the next few years. Currently, WellPoint needs to focus on growing its sales and cutting costs so it can earn the respect of more institutional investors. However, the company is doing so and should continue to see high operating margin growth as it has seen in the past three fiscal years.
Therefore, WellPoint is simply undervalued compared to the rest of its competitors. In addition, the company has great growth potential as well. The same may be said about all the corporations in this industry, but WellPoint's PEG, with growth estimated for the next five years, is not only below the magic number of one, but below both CIGNA and UnitedHealth's respective numbers. The company does not offer dividends to entice investors, but it is currently trading below its 50 day SMA and investing in the stock now will reap even more benefits than a few months or years from today. There is no argument that medical plans will always be in demand. But demand will be outrageous five to ten years from today, and now is the perfect opportunity to use this foresight for your financial benefit.
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