WellPoint Exceeds Expectations - Analyst Blog

WellPoint Inc. (WLP) reported its fourth-quarter income from continuing operations of $524.7 million or $1.33 per share, surpassing the Zacks Consensus Estimate of $1.21. This also compares favorably with the income of $536.0 million or earnings of $1.16 in the year-ago quarter.

WellPoint also posted its income from continuing operations of $2.8 billion or $6.74 per share for fiscal year 2010, surpassing the Zacks Consensus Estimate of $6.60 and the income of $2.9 billion or $6.09 in the fiscal year 2009. The company's earnings were in-line with the management's guidance of above $6.60 earnings per share for the fiscal year 2010.

The improved showing was attributable to higher operating cash flows and the implementation of organizational changes in the health care. The sale of NextRx pharmacy benefit management subsidiaries to Express Scripts (ESRX) in the fourth quarter of 2009 also contributed a significant return of capital.

WellPoint's income from continuing operations excludes net investment gains of $24.1 million after-tax, or approximately 7 cents per share in the fourth quarter of 2010, and $100.2 million after-tax, or approximately 23 cents per share in fiscal 2010, which was partially offset by an intangible asset impairment charge of $13.7 million after-tax, or 3 cents per share.

The earnings of the fourth quarter of 2009 excluded the after-tax net income of $2.2 billion, or $4.79 per share, resulting from a gain on the sale of the NextRx, partially offset by costs for restructuring activities and intangible asset impairments.

Fiscal year 2009 excluded after-tax net income of approximately $1.8 billion, or $3.79 per share, resulting from the gain on the sale of NextRx, partially offset by net investment losses, intangible asset impairments and costs for restructuring activities.

Including these one-time items, WellPoint reported a net income of $548.8 million or $1.40 per share in the fourth quarter 2010 as opposed to $2.7 billion or $5.95 per share in the prior-year quarter. Net income in 2010 was $2.9 billion or $6.94 per share as against $4.7 billion or $9.88 per share.

Behind the Headlines

Total operating revenues for the quarter came in at approximately $14.4 billion, while lagging the $15.1 billion revenues by 4.3% from the year-ago quarter. This decline was partially attributable to the conversion of the large municipal group to a self-funded arrangement during the second quarter, and due to the transfer of the UniCare business in Texas and Illinois.

It was also disappointing to see a significant decline in medical enrollment during the reported quarter and full year of 2010, with enrollment of 33.3 million members as on December 31, 2010, down 1.0% from approximately 33.7 million as on December 31, 2009.

The decline occurred in the non-Blue business, due to the transfer of WellPoint's UniCare Individual and Group business in Texas and Illinois to another Blue Cross & Blue Shield plan during early 2010.

However, this decline was partially offset by the increase in the number of members in its Blue-branded Commercial products and Federal Employee Program. The members, however, declined in the State Sponsored and Senior businesses.

Medical enrollment declined 0.4% in the fourth quarter of 2010, primarily due to a reduction in the company's BlueCard enrollment, reflecting sequentially lower BlueCard claims volume and a decline in members in the Individual business.

WellPoint posted a benefit expense ratio (benefit expenses as a percentage of premium revenue) of 84.5% in the reported quarter as against 85.8% in the fourth quarter of 2009, driven by the Local Group business and a reduction in the targeted margin for adverse deviation in the medical claims payable balance.

However, the benefit expense ratio for WellPoint's Senior business increased in the quarter, primarily reflecting the reduction in federal reimbursement rates for the Medicare Advantage program in 2010.

On the other hand, the selling, general, and administrative (SG&A) expense ratio (SG&A expenses as a percentage of premiums, administrative services fees and other revenue) climbed to 16.4% in the fourth quarter of 2010.

This represents a year-over-year increase of 40 basis points from 16.0%, reflecting higher incentive compensation expense and the impact of lower operating revenue in the current year quarter, partially offset by net reductions in other administrative costs due to the WellPoint's ongoing efficiency initiatives and the sale of NextRx.

Segment Results

Commercial Business: Operating gains in the segment increased 89.6% year over year to $600.7 million in the fourth quarter of 2010 and 27.0% year over year to $3.1 billion in fiscal 2010.

Consumer Business: Operating gains in the segment plummeted 29.5% year over year to $112.0 million in the reported quarter and declined 21.8% year over year to $1.0 billion in fiscal 2010.

Other: Operating gains in this segment experienced an operating loss of $19.6 million in the fourth quarter of 2010, compared with an operating gain of $100.8 million in the fourth quarter of 2009.  This was due primarily to the fact that fourth quarter 2009 results included two months of NextRx operations prior to its sale on December 1, 2009.

WellPoint's Others segment also faced an operating loss of $8.8 million in full year 2010 as compared with an operating gain of $469.4 million in full year 2009.

Evaluation of Capital Structure

WellPoint generated operating cash flow of $587.0 million in the fourth quarter of 2010 and $1.4 billion in the fiscal year 2010, which included $1.2 billion of tax payments related to the 2009 sale of NextRx. At the end of December 31, 2010, cash and investments at the parent company totaled approximately $3.3 billion.

As of December 31, 2010, WellPoint had $148.5 million remaining under its share repurchase authorization. During the reported quarter, WellPoint repurchased 17.8 million shares for $1.0 billion and repurchased 76.7 million shares of its stock for approximately $4.4 billion in fiscal 2010, following the sale of NextRx.

During the fourth quarter of 2010, WellPoint witnessed net investment gains of $37.2 million pre-tax, consisting of net realized gains from the sale of securities totaling $47.6 million, partially offset by other-than-temporary impairments totaling $10.4 million.

In the prior year quarter, WellPoint experienced net investment losses of $4.5 million pre-tax, consisting of other-than-temporary impairments of $40.5 million, primarily offset by net realized gains from the sale of securities totaling $36.0 million.

Comparison with Competitors

Rival company Unitedhealth Group, Inc. (UNH) reported its fourth quarter results on January 20, 2011 with income from continuing operations of 94 cents per share, better than the Zacks Consensus Estimate of 90 cents. Full year EPS was $4.10, which also surpassed the Zacks Consensus Estimate of $3.99.

WellPoint's peers like CIGNA Corporation (CI) is scheduled to report its fourth quarter and fiscal year 2010 results on February 3, followed by Aetna Inc. (AET) on February 4 and Humana Inc. (HUM) on February 7.

Outlook for Fiscal 2011

WellPoint anticipates a net income of at least $6.30 per share.

Our Recommendation

Though we are pleased with the strong results of WellPoint along with solid capital management, we remain wary of the impact of the health insurance reforms and expect these reforms to increase unemployment and stretch profit margins of WellPoint and its competitors. The resulting downward pressure is likely to overshadow the stock.

WellPoint has a strong cash flow generation, leading market share positions, diversified product portfolio, proven track record of execution, attractive valuation, and consistency that would provide long-term value to its investors. Meanwhile, WellPoint has been increasing its premiums and controlling costs.

Further, WellPoint is well positioned among its peer group and has been strengthening its portfolio through its acquisition strategy, the synergies of which are expected to lead to margin expansion and top-line growth. Moreover, the sale of its in-house pharmacy benefits business to Express Script has strengthened its balance sheet and fueled a major stock repurchase.

Currently, WellPoint carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the stock over the near term.

 
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