We maintain our ‘Neutral’ recommendation on WellPoint Inc. (WLP) on the back of its leading market share, stable ratings, diversified product portfolio and strategic acquisitions. However, decline in membership and increasing benefit expenses are the downsides.
WellPointreported first-quarter 2012 adjusted income of $2.34 per share, surpassing the Zacks Consensus Estimate of $2.28 per share but a penny lower than the year-ago earnings. Adjusted income declined 11% to $794.1 million from $891.0 million in the first quarter of 2011.
WellPoint is a dominant player in each of its Blue Cross and Blue Shield state markets, with over 33.5 million medical members. Moreover, management estimates more than 1.0 million baby boomers to become eligible for the company’s Medicare program every year through 2030, across all 14 states where WellPoint’s Blue Cross and Blue Shield plans have a presence.
WellPoint has a strong capital and cash position, which fuels efficient capital deployment via cash dividends and stock repurchases. The company paid $95.8 million in cash dividends and repurchased shares worth $679.8 million during the first quarter of 2012, and had $3.7 billion remaining for future repurchase as of March 31, 2012. The company is expected to buy back a total of 2.5 million shares during 2012.
However, WellPoint’s debt-to-capital ratio is steadily rising over the years. The ratio increased from 25.3% in 2009 to 29.6% in 2011. Although it inched down to 28.7% in the first quarter of 2012, the decline is too small to indicate a reversal of the long-term trend. While the ratio is still within the targeted range of 25% to 35%, it stands higher than the average for the health and managed care sector.
Moreover, WellPoint’s membership has been declining since 2008, following the recession and the consequent surge in unemployment levels. Membership declined to33.7 millionduring the first quarter of 2012 from 34.2 million in the prior-year quarter. A further decline is expected based on the impact of certain strategic changes made by the company in the self-funded National Accounts in the California regional PPO Medicare Advantage product and in the New York small-group market. Additionally, the in-group membership change is expected to remain negative in 2012.
However, despite the declining membership, WellPoint is the largest insurer on the basis of enrollment, beating competitors likeAetna Inc. (AET), CIGNA Corporation (CI) and UnitedHealth Group Inc. (UNH). Currently, the Zacks Consensus Estimate for the company’s second-quarter 2012 earnings stands at $2.09 per share, up about 14.1% year over year. For 2012, earnings are projected to be $7.76 per share, representing a year over year surge of nearly 10.9%.
The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
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