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WellPoint Q1 Earnings Beat Ests, Down Y/Y

Zacks Equity Research

WellPoint Inc. (WLP) reported first-quarter 2014 adjusted income of $2.30 per share, beating the Zacks Consensus Estimate of $2.12 per share. However, adjusted income declined from the year-ago earnings of $2.94 per share.

Including net realized gains on investments, other than temporary impairment losses on investments, loss on extinguishment of debt and 1-800 CONTACTS 2014 income of 10 cents, WellPoint posted net income of $2.40 per share in the reported quarter compared with $2.89 per share in the first quarter of 2013. The year-ago quarter included net investment losses of 5 cents per share.

Higher expenses along with deterioration in the Commercial & Specialty Business and Other segment mainly led to the downside.

Operating revenues of WellPoint for the reported quarter stood at $17.6 billion that missed the Zacks Consensus Estimate of $18 billion. However, revenues rose 1.2% from the year-ago quarter. The improvement resulted from higher membership in the Medicaid, Commercial self-funded and FEB lines of businesses and growth in premiums. However, these were partly mitigated by lower Medicare revenues due to lower membership and deterioration in the Local Group business.

WellPoint’s premium revenues increased 0.5% year over year to $16.5 billion, administrative fees rose 12.9% to $1.1 billion and other revenues grew 1.1% to $9.5 million. Meanwhile, total expenses increased 2.7% to $16.7 billion.
Medical enrollment of WellPoint increased 3.6% to 36.9 million as of March 31, 2014, from 35.7 million as of Dec 31, 2013 on higher enrolment in the Commercial and Specialty Business segment.

The upside resulted from an improvement in the National, Local Group and Individual markets. Moreover, increased enrollment in the Medicaid and FEP business also contributed to the improvement. However, a decline in membership in the Medicare business partially mitigated the positives.

WellPoint posted a benefit expense ratio (benefit expenses as a percentage of premium revenues) of 82.7% in the reported quarter, declining 100 basis points from 83.7% in the first quarter of 2013. The improvement was attributable to growth in Medicaid business.  

Segment Results

Commercial & Specialty Business: This segment covers the Local Group, National Accounts, Individual and Specialty businesses. Operating revenues declined 1.6% year over year to $9.7 billion in the reported quarter.

Operating gains in the segment, however, declined 29.8% year over year to $886.1 million in the quarter, mainly due to higher SG&A expenses to accommodate changes related to the ACA implementation and an increase in administrative costs that stemmed from Commercial membership growth.

Government Business: This segment consists of the Medicaid and Medicare businesses, National Government Services, and the Federal Employee Program (FEP). Operating revenues climbed 4.9% year over year to $7.9 billion in the quarter under review.

Operating gains in the segment stood at $239.6 million in the reported quarter, comparing favorably with $102.6 million reported in the year-ago quarter. Growth in Medicaid business that was attributable to enhanced cost efficiency, medical cost performance and obtainment of actuarially strong rates mainly led to the upside.

Other: This segment comprises the unallocated corporate expenses as well as some businesses which are not covered by the other two segments. Operating revenues in the reported quarter came in at $6 million, down 4.8% year over year.

Operating loss in this segment amounted to $7 million, narrowing from $7.4 million loss posted in the year-ago quarter.

Financial Update

As of March 31, 2014, WellPoint had cash and cash equivalents of $2 billion, compared with $1.6 billion as of Dec 31, 2013. Operating cash flow in the first quarter of 2014 amounted to $1.4 billion, as against $956.9 million in the first quarter of 2013. This improvement was driven by favorable timing of Individual enrollment and associated benefit payments as well as timing of payments from various health care reform fees.  

Long-term debt of WellPoint increased to $13.9 billion as of March 31, 2014, from $13.6 billion as of Dec 31, 2013. Shareholder equity stood at $24.3 billion as of March 31, 2014, down from $24.8 billion as of Dec 31, 2013, while total assets increased to $61.7 billion from $59.6 billion at the end of 2013.

Share Repurchase

WellPoint repurchased approximately 14.3 million shares for $1.3 billion in the reported quarter. As of March 31, 2014, WellPoint had approximately $2.4 billion worth of authorization remaining under its share repurchase program.

Dividend Update

During the reported quarter, WellPoint paid a quarterly cash dividend of 43.75 cents per share. This resulted in a cash distribution of $123.4 million.

On April 29, 2014, WellPoint declared second-quarter dividend of 43.75 cents per share that will be paid on June 25, 2014 to shareholders of record as of June 10, 2014.

Outlook for 2014

WellPoint expects adjusted net income in 2014 to exceed $8.40 per share. The Zacks Consensus Estimate of $8.41 is on par with the company guided figure. Including net favorable items worth 10 cents per share in the first quarter, net income for 2014 is expected to exceed $8.50 per share, higher than the previous guidance of over $8.00 per share.

Operating revenues are projected to exceed $73.5 billion, higher than the previous guidance of around $73 billion.

WellPoint expects Medical enrollment to be in the range of 36.95–37.05 million. Fully-insured membership is estimated at 14.5–14.55 million while self-funded membership is forecasted in the 22.45–22.5 million range.

WellPoint expects benefit expense ratio to remain in the range of 83.4–90.0% while SG&A ratio is projected in the 15.5–16.1% band.

The company expects operating cash flow to exceed $2.4 billion. However, this is lower than $3.1 billion reported in 2013.

Zacks Rank

WellPoint currently carries a Zacks Rank #2 (Buy). Investors interested in the healthcare services industry may also consider other well-performing stocks like Aetna Inc. (AET), Centene Corp. (CNC) and RadNet, Inc. (RDNT). All three stocks carry the same Zacks Rank as WellPoint.

Read the Full Research Report on WLP
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