Balanced View on Aetna - Analyst Blog

On April 1, 2014, we issued an updated research report on U.S health insurer Aetna Inc. AET.

In 2014, Aetna's earnings are expected to be impacted by headwinds related to the Affordable Care Act which includes rate pressures related to Medicare Advantage reimbursement, industry fees and taxes and a less profitable mix of business from public health exchanges. Other health insurers UnitedHealth Group Inc. UNH, Humana Inc. HUM are also expected to face pressures from these factors in 2014.

However, Aetna should benefit from growth in the Medicaid and Medicare segments, its fast-growing health services segment and an expanding provider network.

Meanwhile, Aetna is witnessing earnings accretion from the Coventry acquisition. The Coventry takeover has enabled the company to position itself in the fast-growing government businesses. The company expects revenues of $200 million in 2014 which is expected to increase to $400 million in 2015.

Aetna has also made considerable investments in products and technology, intending to extend its core health business and capitalize on exciting new consumer and provider opportunities emerging in the marketplace.

Aetna is also making good progress in its government business which includes Individual Medicare Advantage MA, Group MA, Dual-Eligibles, Medicaid Expansion and Medicare Supplement. Premium from this business is expected to be more than $19 billion in 2014 compared with $15 billion in 2013.

A strong balance sheet with low leverage is yet another positive.

With respect to earnings performance, Aetna delivered positive surprise in 2 of last 4 quarters with an average beat of 3.84%. In the last reported quarter earnings missed the Zacks Consensus estimate by a penny. Earnings, however, improved 43% year over year owing to earnings accretion from the Coventry acquisition as well as higher underwriting margins primarily in the Commercial business, partially offset by lower underwriting margins in the Medicare business.

The company is expected to release its first-quarter 2014 earnings shortly. As per the Zacks Consensus Estimate, first-quarter earnings are expected to be $1.56 per share, up 4.22%.

Aetna carries a Zacks Rank #2 (Buy). Another stock WellPoint Inc. WLP, with the same Zacks Rank as Aetna, is worth considering.