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WellPoint's (WLP) Increased Membership Raises Optimism

On Sep 17, 2014, we issued an updated research report on WellPoint Inc. (WLP). We believe that the company’s strong membership, successful divestitures, prudent capital management and modest cash position should make way for inorganic growth and efficient capital deployment. However, adverse effects of the Health Care Reform, stiff competition and high financial leverage are headwinds.

Earlier, the company reported second-quarter earnings that surpassed the Zacks Consensus Estimate but declined year over year on higher expenses and deterioration in the Commercial & Specialty Business and Other segment.

WellPoint has been witnessing substantial earnings growth over the past few quarters, driven by improvement in operating cost structure, strategic acquisitions and efficient capital management. Further, WellPoint’s key strength lies in its independent license for marketing products under Blue Cross Blue Shield Association (:BCBSA), the most recognized brand in the industry that enhances earnings further. The company also sustains its leading position in the National Accounts marketplace based on its disciplined pricing for both new business and renewals.

WellPoint has witnessed an increase in memberships over the past few years and the first half of 2014 was no exception. The rollout of exchanges and national accounts in the commercial segment, along with the Medicaid expansion in the government segment, contributed positively in this regard.

This trend of increased memberships is expected to continue through 2014, particularly aided by the ACA-driven expansion and the recent RFP wins in Florida, Kentucky, Georgia and California. WellPoint also remains focused on boosting core operations through divestitures. Towards this end, the company divested its online contact lens subsidiary, 1-800 CONTACTS and the eye glasses business, glasses.com in the first half of 2014.

WellPoint’s strong capital and cash position have enabled payment of cash dividends and the pursuit of stock repurchases. Subsequently, the company reduced its share count by 7.7% at Jun 2014-end from that of year-end 2013 through buybacks. Moreover, WellPoint has been succeeding in the Administrative Services Only (:ASO) marketplace. The acquisition of a large ASO state contract in the first quarter of 2014 has also led to an increase in self-funded medical membership in the first half of 2014.

On the flip side, the healthcare reform has reduced the selling season for the Medicare Advantage plans. Moreover, establishment of the minimum medical loss ratios is increasing expenditures for healthcare companies. In the first half of 2014, WellPoint incurred significant general and administrative expenses related to the Health Insurance Provider (HIP.V) fee that led to deterioration in the SG&A expense ratio.

WellPoint is also burdened with significant financial leverage. The debt-to-capital ratio has been deteriorating and the first half showed no trend reversal, thus raising concerns about sustainable liquidity in the future. Moreover, higher medical costs in the Senior, Local Group and State-Sponsored businesses, lower favorable prior year reserve development and the impact of minimum medical loss ratio requirements have affected the benefit expense ratio adversely in the past.

Further, medical cost trends are expected in the range of 6%–7% in 2014, higher than that in 2013, which is likely to make the ratio deteriorate further. Additionally, WellPoint faces competitive threats from peers which have greater market share, robust financial resources, higher ratings and stronger brand recognition.

Currently, WellPoint has a Zacks Rank #3 (Hold). Better-ranked stocks in the healthcare services space that look attractive at current levels include Triple-S Management Corp. (GTS), Centene Corp. (CNC) and Chemed Corp. (CHE). While Triple-S Management and Chemed sport a Zacks Rank #1 (Strong Buy), Centene Corp has a Zacks Rank #2 (Buy).

Read the Full Research Report on WLP
Read the Full Research Report on CHE
Read the Full Research Report on CNC
Read the Full Research Report on GTS


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