S&P Raises WellPoint's Outlook


On Monday, credit rating agency Standard and Poor’s (S&P) Rating Services raised its outlook on WellPoint Inc. (WLP) to ‘Positive’ from ‘Stable’. The rating agency also affirmed the company’s counterparty credit rating (:CCR) for senior unsecured notes at “A-” and commercial paper at “A-2”.

Additionally, S&P affirmed the CCR and financial strength ratings (FSR) of UNICARE Life & Health Insurance Co., a subsidiary of WellPoint, at “BBB” with a stable outlook. The agency has retained the CCR and FSR of the company’s other subsidiaries at “A+” and raised their outlook to positive from stable. The umbrella company has a lower CCR than its subsidiaries as the company faces higher regulatory constraints and relies on the dividends from its subsidiaries for its interest obligations.

The ratings affirmation and outlook revisions stemmed from WellPoint’s operating efficiency, wide product portfolio, large operating scale and strong cash flows, which generate ample liquidity, thereby providing financial flexibility. Moreover, the company’s capitalization level comfortably surpasses the requisite regulatory level.

Additionally, S&P believes that WellPoint will be able to easily maintain and even expand its market share. The revenues are also expected to grow at a comfortable pace, while the health care reform-related risks are on the decline. The impressive fundamentals of the company could lead to an upward rating revision.

On the flip side, if WellPoint’s adjusted debt leverage surpasses 35%, the earnings before interest, taxes, depreciation and amortization (:EBITDA) coverage sinks below 8 or operating margin stays below 6% for a continued period, then a downward revision of the outlook can be expected.

WellPoint is the largest insurer on the basis of enrollment, beating competitors like Aetna Inc. (AET), CIGNA Corporation (CI) and UnitedHealth Group Inc. (UNH). Currently, the Zacks Consensus Estimate for the company’s first quarter earnings stands at $2.28 per share, an estimated year over year decline of roughly 2.8%. For 2012, earnings are projected to be $7.65 per share, representing an estimated year over year surge of nearly 9.3%.

Currently, WellPoint carries a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. Considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the stock.

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