Balanced View on WellPoint - Analyst Blog

On May 30, 2014, we issued an updated research report on WellPoint Inc. WLP. We believe that the company's Blue Cross Blue Shield Association license, disciplined pricing for both new business and renewals, wide product portfolio and the rollout of exchanges should help the company generate growth. However, rising expenses due to implementation of the Health Care Reform, competitive pressure and high financial leverage are headwinds.

Earlier, WellPoint reported first-quarter 2014 earnings that surpassed the Zacks Consensus Estimate. However, results compared unfavorably with the year-ago quarter earnings due to higher expenses and poor performance across the Commercial & Specialty and Other segments.

WellPoint, a dominant player in all BCBS state markets with 36.9 million members, can access the provider networks of any other BCBS plan across the U.S. With an estimated 1.0 million baby boomers to become eligible for the Medicare program every year till 2030 across the states where WellPoint has a presence, membership is expected to rise further. Membership increased in the first quarter of 2014 owing to the rollout of exchanges and this trend is expected to continue through 2014.

WellPoint also forms alliances with various companies for business expansion. Moreover, for core business enhancement, WellPoint's divestiture of its online contact lens subsidiary, 1-800 CONTACTS and the eye glasses business, glasses.com in Feb 2014 are expected to increase the company's focus on its insurance operations, thereby enabling the capitalization of core growth opportunities. Further, WellPoint's strong capital and cash position have enabled the payment of cash dividends and pursuit of stock repurchases that should boost investors' confidence in the stock. This Zacks Rank #3 (Hold) company has also been witnessing success in the Administrative Services Only (ASO) marketplace, which led to a surge in memberships in first-quarter 2014.

On the flip side, imposition of the compulsory annual Health Insurance Provider Fee (HIP) as part of the Health Care Reform is increasing WellPoint's general and administrative expense. This trend is expected to persist in the coming period. The company's high financial leverage is another matter of concern.

Benefit expense ratio, an indicator of top line growth in comparison to expenses, also has been volatile over the past few years. The first-quarter witnessed deterioration when compared to the ratio at 2013 year-end. Higher medical cost projection for full-year 2014 is likely to make the ratio deteriorate further. Additionally, competition from its equally strong peers who have a greater market share, robust financial resources, higher ratings and stronger brand recognition might limit WellPoint's business opportunities and weigh on its financials going forward.

Other Stock to Consider

Investors interested in the healthcare services space could consider better-ranked stocks like Select Medical Holdings Corporation SEM, Centene Corp. CNC and Health Net, Inc. HNT. While Select Medical sports a Zacks Rank #1 (Strong Buy), Centene and Health Net have a Zacks Rank #2 (Buy).