Coventry Beats, Raises Outlook - Analyst Blog

Coventry Health Care Inc. (CVH) reported its third-quarter income from continuing operations of $183.2 million or $1.24 per share, exceeding the Zacks Consensus Estimate of 67 cents. This also compares favorably with income of $100.4 million or 68 cents in the year-ago quarter. The improved showing was due to a continued emphasis on cost containment throughout the organization.

Coventry's income from continuing operations excludes the 5 cents per share favorable impact of the Medicare Advantage Private Fee-for-Service (MA-PFFS) product. The Medicare offering stands discontinued from January 1, 2010.

Including the impact of this item, Coventry reported net income of $189.9 million or $1.29 per share. Net income in the prior-year quarter was $70.6 million or 48 cents per share, which included loss from discontinuing operations of $29.8 million or 20 cents per share.

Behind the Headlines

Total operating revenues in the reported quarter declined 18% year over year to $2.84 billion, compared with the Zacks Consensus Estimate of $2.85 billion. Managed care premiums decreased 19% to $2.54 billion, while revenues from management services increased marginally by 0.6% year over year to $292.6 million. Total membership in the quarter increased 0.5% to 4.9 million.

Coventry witnessed total operating expenses for the reported quarter of $2.54 billion, down 22% from the year-ago quarter. Medical costs, the major operating expense component, fell 26.2% to $1.96 billion. Coventry also posted cost of sales of $64.6 million, up 3.6% year over year, while selling, general and administrative expenses (SG&A expenses) declined 8.7% to $481.3 million and depreciation and amortization (D&A) dropped 14% to $34.8 million in the reported quarter.

Health Plan Commercial Group Risk: The Health Plan Commercial Risk membership for the reported quarter was 1,533,000, an increase of 102,000 from the prior-year quarter. Health Plan Commercial Risk premium yields in the reported quarter climbed to $315.82 per member per month (PMPM), up 3.8%. The Health Plan Commercial Group Risk MLR in the quarter came in at 76.8% as against 82.1% last year.

Medicare Advantage Coordinated Care Plans (MA-CCP): Coventry reported MA-CCP membership of 193,000, against 185,000 in the year-ago quarter. The Medicare Advantage MLR came in at 77%, compared to 89.4% a year ago.

Medicare Part D: Medicare Part D membership stood at 1.610 million at the end of the reported quarter, against 1.636 million in the year-ago quarter. The Medicare Part D MLR in the quarter came in at 79.0%, against 79.4% last year.

Medicaid Risk: The Medicaid membership at the end of the reported quarter stood at 462,000, which reflected an increase of 71,000 members from the year-ago quarter. The Medicaid MLR in the quarter came in at 89.0%, against 86.1% last year.

Evaluation of Balance Sheet and Capital Structure

Coventry ended the quarter with approximately $1.79 billion of cash and cash equivalents. Furthermore, Coventry exited the quarter with $1.6 billion in long-term debt.

As of September 30, 2010, Coventry had total assets of $8.34 billion and shareholders' equity of $4.06 billion.

Comparisons with Competitors

Rival company Unitedhealth Group, Inc. (UNH) reported third-quarter results on October 19, 2010. Income from continuing operations was $1.14 per share, substantially better than the Zacks Consensus Estimate of 84 cents.

Aetna Inc. (AET) reported third-quarter profit from continuing operations of 84 cents per share on November 3, well ahead of the Zacks Consensus Estimate of 67 cents.

WellPoint, Inc. (WLP) reported third-quarter results on November 3 with income from continuing operations of $1.74 per share, surpassing the Zacks Consensus Estimate of $1.58.

Outlook for 2010

For fiscal 2010, Coventry expects to earn between $3.52 and $3.62 per share (excluding the impact from MA-PFFS in the reported quarter as well as impact of litigation charges). The previous guidance was in the range of $2.55 and $2.70 per share.

Coventryexpects GAAP EPS guidance in the range of $2.74-$2.84 per share for fiscal 2010, against the previous guidance of $1.72-$1.87. These results include the unfavorable impact of litigation charge and favorable impact of MA-PFFS.

Coventry projects risk revenue of $10.3 billion to $10.5 billion and management services revenue of $1.165 billion to $1.180 billion

The company expects its fiscal 2010 consolidated revenue guidance to a range of $11.465 billion - $11.680 billion. The medical loss ratio is expected between 79.6% and 80.1% in fiscal 2010.

Coventry anticipates cost of sales in the range of $245.0 million-$250.0 million, with SG&A expenses in the range of $1.94 billion-$1.96 billion, along with D&A between $139.0 million and $143.0 million in fiscal 2010.

Shares outstanding at year end 2010 are expected to be 147 million to 147.5 million.

Our Take

Coventry has a solid fundamental business and continues to grow with all seven core businesses performing at or above internal expectations. Further, we believe that Coventry is also growing on an acquisition front, as it is making continuous efforts to expand its footprint in Missouri and Arkansas.

On October 1, Coventry completed the acquisition of Mercy Health Plans ("MHP") and its subsidiaries from Sisters of Mercy Health System for an undisclosed amount. Coventry said the acquisition is expected to be slightly accretive to its 2011 earnings and will serve more than 1.2 million members in its six-state Midwest region upon the completion of the acquisition.

We believe that Coventry's acquisitive growth strategy will help it to leverage its regional service centers and improve operating efficiencies, largely through economies of scale.

We maintain a Neutral recommendation on Coventry Health Care in the long term. Thequantitative Zacks #2 Rank (short-term Buy rating) for the company indicates upward pressure on the stock over the near term.

 
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