We are reiterating our recommendation on the shares of Aetna Inc. (AET) at Neutral prior to its third quarter earnings release.
We expect Aetna to continue performing favorably over the long term. The company has made considerable investments in products and technology, with an intention to extend its core health business and capitalize on exciting new consumer and provider opportunities, which are emerging in the marketplace. Aetna's strong operating results and significant capital generation will enable it to make further investments.
The company has announced it will acquire Coventry Health Care Inc., which will deepen its footprint in the Medicare market. The acquisition is also expected to be immediately accretive to earnings.
Aetna is also aiming at generating incremental fee revenues by managing infrastructure required for care organizations.
With respect to Aetna’s international business, the product launches in China, earlier during the year, met with initial success. The company also entered the Indian market with the acquisition of the Indian Health Organization. These are indicative of Aetna’s efforts to expand its global footprint and develop new business models.
Aetna has made a number of acquisitions in its Commercial business such as Prodigy. Prodigy's highly-customized offering addresses a portion of the self-funded market, covering approximately 27 million individuals. Additionally, the company acquired PayFlex, an administrator of Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs) and other accounts that support consumer-based health plan designs.
Aetna’s balance sheet is quite strong with moderate leverage. Its excess cash generation in 2011 enabled it to complete four significant acquisitions, repurchase 45 million shares and institute a meaningful shareholder dividend.
However, membership growth, restriction on premium rate increase, an increase in medical costs expected in 2012 and a low interest rate environment are some of the headwinds, which the company is facing at this moment.
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