Coventry Beats, Raises Outlook


Coventry Health Care Inc. (CVH) reported second-quarter 2012 operating earnings per share of 68 cents, which surpassed the Zacks Consensus Estimate of 64 cents but was lower than the prior-year earnings of 83 cents. Operating income amounted to $99.4 million in the reported quarter.

The earnings per share for the reported quarter excludes an impairment charge of $7.7 million or 3 cents per share related to write down of intangible assets, while the prior-year quarter’s results exclude earnings of 3 cents per share related to the Medicare Advantage Private Fee-for-Service (MA-PFFS) and 68 cents related to the definitive settlement agreement associated with a provider class action litigation in Louisiana.

Including the impact of the non-recurring items, Coventry reported net income of $91.7 million or 65 cents per share in the reported quarter compared with $224.5 million or $1.50 per share in the prior-year quarter.
Operating revenues in the reported quarter surged 16% year over year to $3.5 billion, at par with the Zacks Consensus Estimate. Managed care premiums increased 17.2% year over year to $3.21 billion, while revenues from management services climbed 4.4% to $308 million.

Coventry witnessed a year-over-year growth of 25.8% in total operating expense to $3.37 billion. Additionally, medical costs, the major operating expense component, increased to $2.76 billion from $2.25 billion in the prior-year quarter.

Likewise, Coventry’s selling, general and administrative (SG&A) expenses increased to $504.6 million from $484.9 million a year ago, while depreciation and amortization (D&A) expenses increased to $43.7 million from $33.4 million in the year-ago quarter. However, cost of sales declined to $67.2 million from $70.2 million in the second quarter of 2011.

Total membership witnessed growth of 19,000 from the first quarter of 2012 to 5,281,000 in the reported quarter.
Commercial Risk: The Commercial Risk membership for the reported quarter was 1,519,000, down 30,000 members from the prior quarter. Commercial Risk Medical Loss Ratio (MLR) in the reported quarter came in at 83.0%.

Medicare Advantage Coordinated Care Plans (MA-CCP): Coventry reported MA-CCP membership of 253,000, showing an increase of 30,000 members from the first quarter of 2012. The MA-CCP MLR came in at 84.1%.

Medicare Part D: Medicare Part D membership stood at 1,494,000 at the end of the reported quarter, up by 36,000 members from the prior quarter. Similarly, the Medicare Part D MLR in the quarter came in at 90.0%.
Medicaid: The Medicaid membership at the end of the reported quarter stood at 932,000, which reflected an increase of 465,000 members over the second quarter of 2011. The Medicaid MLR in the quarter came in at 93.3%.

Balance Sheet and Capital Structure

Coventry ended the reported quarter with approximately $1.52 billion in cash and cash equivalents, down from $1.58 billion at the end of 2011. Deployable cash at the parent company stood at $850 million at the end of June 2012. Operating cash flow totaled $61.0 million at the end of the reported quarter.

As of June 30, 2012, Coventry had total assets of $8.87 billion and shareholders’ equity of $4.51 billion. The company exited the reported quarter with $1.58 billion in long-term debt, almost at par with 2011 end.

Share Repurchase Update

Coventry repurchased 9.3 million shares for $300 million in the reported quarter, which is a record-high for the company.

Outlook for 2012

Coventry affirmed its 2012 earnings per share guidance of $3.10–3.30. Projection for risk revenue was raised to $12.900–13.065 billion from $12.875–13.050 billion, while the guidance for the management services revenue was increased to $1.165–1.200 billion from $1.145–1.180 billion.

The company also increased its consolidated revenue guidance range to $14.065–14.265 billion from $14.020–14.230 billion. Coventry’s consolidated MLR will likely be in the 84.0–84.7% band against the previous guidance of 83.6–84.4%.

Coventry anticipates the cost of sales expense to lie in the range of $257–263 million, up from the earlier projection of $251–257 million. The company also projects SG&A expenses to be in the range of $2.07–2.11 billion, D&A between $148–152 million and interest expense in the range of $99.0–101.0 million in fiscal 2012.

Coventry’s other income is projected between $97 million and $101 million, while tax rate is estimated to be in the 37.7–38.3% range. Shares outstanding at year end are expected to be in the range of 136–138 million.

Peer Take

Coventry’s competitor, WellPoint Inc. (WLP) reported second-quarter 2012 adjusted income of $2.04 per share, lagging the Zacks Consensus Estimate by a penny but surpassing the year-ago earnings of $1.83 per share. Another peer, UnitedHealth Group Inc. (UNH) declared second-quarter 2012 earnings of $1.27 per share, up 9% over the year-ago quarter.

Coventry carries a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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