Updated Research Report on WellPoint - Analyst Blog

We issued an updated research report on WellPoint Inc. WLP. The company recently reported fourth-quarter 2013 earnings that surpassed the Zacks Consensus Estimate but declined year over year. Top line also exceeded our expectations and also increased year over year.   

Taking into account the divestitures and collaboration with The American Academy of Pediatrics, WellPoint's future prospects look promising. One can retain the stock in its long-term holding.

With respect to earnings trend this Zacks Rank #3 (Hold) managed care organization delivered positive surprises in the last four quarters with an average beat of 16.24%. Additionally, the Zacks Consensus Estimate for 2014 is pegged at $8.36 per share, higher then the company guided EPS of $8.00 while the same for 2015 stands at $8.98 per share, up 7.5% year over year.

WellPoint's key strength lies in its independent license for marketing products under BCBSA, the most recognized brand in the industry. This enhances the company's earnings considerably. The strong BCBS brand allowed WellPoint to succeed in its membership migration strategy in 2013.

The rollout of exchanges is also expected to generate membership growth opportunities going forward. Moreover, with the execution of the marketing and enrolment efforts, we expect membership to increase through 2014.

WellPoint remains active in collaborating with companies for business expansion. The recent collaboration with The American Academy of Pediatrics is expected to enhance the membership base of the company. WellPoint has also divested its online contact lens subsidiary, 1-800 CONTACTS, and eye glasses business, glasses.com.

These divestitures are expected to help WellPoint focus on its insurance operations, thereby capitalizing on core growth opportunities. Additionally, to boost investor sentiment, the company announced a 17% quarterly dividend hike in Jan 2014 and increased its share repurchase authorization by $3.5 billion in Sep 2013.

However, on the tepid side, WellPoint's leverage has increased over the past few years. In fact, the ratio continues to be above the targeted range of 25–35%, as indicated by the bank covenants. Moreover, higher medical costs, 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. Medical cost trends are expected to increase further in 2014, which is likely to deteriorate the ratio.

Moreover, the health care reform has reduced the selling season for the Medicare Advantage plans – a major product of WellPoint. Further changes that are to be implemented in 2014, such as the ban on annual and lifetime coverage caps, annual fees on health insurance companies and excise tax on high premium insurance policies, will likely increase expenses, weighing on margins. Stiff competition from peers also poses significant risk as this might limit the company's business opportunities and adversely impact its financials going forward.

Other Stocks

Aetna Inc. AET, Chemed Corp. CHE and China Cord Blood Corp. CO are some better-ranked stocks in the healthcare services space. While Chemed sports a Zacks Rank #1 (Strong Buy), Aetna and China Cord carry a Zacks Rank #2 (Buy).