WellPoint Earnings Preview

Jul.27.10 | About: Anthem, Inc. (ANTM)

WellPoint Inc. (WLP) is scheduled to report its second quarter results before the market opens on Wednesday, July 28. The Zacks Consensus Estimate for the second quarter is $1.55 per share, representing a growth of about 8.6% over the year-ago quarter.

The company has concerns over the impact of the health reform bill and continued high unemployment, which are expected to overshadow the stock. Further, Wellpoint is expected to report in-line results based on its improving fundamentals.

Previous Quarter Performance

Wellpoint’s first quarter operating earnings came in at $1.95 per share, up from the year-ago quarter of $1.62 per share. Besides, earnings surpassed the Zacks Consensus Estimate of $1.66 per share.

The improved showing was attributable to lower medical costs because of the weak flu season coupled with the improvement in Well Point’s Medicaid plans for low-income Americans.

Total operating revenues for the quarter came in at approximately $14.9 billion, a 2.8% year-over-year decline due to the decrease in premium revenue. Other revenue of Wellpoint in the reported quarter plummeted 96.2% year-over-year on account of the sale of NextRx subsidiaries by Wellpoint to Express Scripts Inc. (NASDAQ:ESRX) in late 2009.

Medical membership declined 2.1% year-over-year to approximately 33.8 million as of March 31, 2010. However, Wellpoint’s medical enrollment increased 0.5% sequentially in the first quarter of 2010.

Outlook for 2010

Wellpoint re-affirmed its earnings guidance for fiscal 2010, and expected to earn $6.00 per share (excluding special items) in fiscal 2010.

Operating revenue for fiscal 2010 was projected to be around $58.5 billion as against the earlier projection of approximately $59.0 billion. Wellpoint’s medical membership at the end of fiscal 2010 was projected to be 33.1 million as opposed to an earlier projection of 33.3 million.

The benefit expense ratio was expected to be approximately 84.3% in fiscal 2010 as against 82.6% in fiscal 2009. The selling, general, and administrative (SG&A) expense ratio (SG&A expenses as a percentage of premiums, administrative services fees and other revenue) was projected at 14.6% for fiscal 2010 as opposed to 15.9% in fiscal 2009. Wellpoint has projected an operating cash flow in fiscal 2010 of $1.1 billion.

Earnings Estimate Revisions – Overview

Ahead of the earnings release, we can see some variation in analyst estimates over the past 7 and 30 days. The estimate revision trends show positive sentiments in Wellpoint, implying that the analysts do see a meaningful catalyst for the time being.

Agreement of Analysts

In the last 7 days, only 1 of the 21 analysts covering the stock has raised the estimates for the second quarter 2010. However, 3 of them have nudged up their estimates in the last 30 days. No downward revisions were witnessed during this period.

Similarly, 1 analyst has increased his estimate in the last 7 days and 3 of them have upped their estimates in the last 30 days, out of 19 analysts for third quarter and 22 analysts for fiscal 2010. There were no downward revisions during this period.

We believe that the analysts have upgraded their estimates on the back of Wellpoint’s higher pricing and the loss of higher-cost Medicare and Medicaid members. Further, they are expected to remain impressed with Wellpoint’s efforts to increase its effectiveness in cost-control and claims processing.

However, the fiscal 2011 story looks different, with 2 analysts lowering estimates in the last 7 days and 3 analysts reducing estimates in the last 30 days, implying that the analysts foresee downward pressure on the stock.

Magnitude of Estimate Revisions

Over the 7-day period, the analysts have shown no movement in their second quarter, third quarter and fiscal 2010 estimates as seen from the magnitude of the Consensus Estimate trend. Estimate for fiscal 2011 moved down by two pennies from earnings of $6.68 per share to $6.66. Therefore, the analysts expect Wellpoint to report in line with their estimates.

Over the 30-day period, the analysts have nudged up their second quarter estimates from $1.54 to $1.55 per share and third quarter estimates from $1.57 to $1.59 per share. Estimates have climbed from $6.20 to $6.25 per share for fiscal 2010.

However, the consensus for fiscal 2011 plummeted from operating earnings of $6.70 per share to $6.66 over the same time frame. The declining estimates trend is expected to come from Wellpoint’s higher commercial medical costs and unexpectedly low Medicare revenue. Moreover, the analysts are concerned that the Medical cost ratio requirements related to the health reform that will get into effect in fiscal 2011, will adversely affect the bottom line of Wellpoint.

A similar magnitude of the Consensus estimate trend is seen in the last 60 days in the earnings estimate of second, third and fiscal quarter of 2010 and fiscal 2011, as we have seen over the past 30-day period. However, the magnitude of revisions declined during the second and third quarter of 2010 and fiscal 2011 over the 90-day period, with upward revision in fiscal 2010 results.

Earnings Surprise

Considering earnings surprises, the stock has been almost steady over the last four quarters. We have seen positive surprises in three quarters, which imply that the company has beaten the Zacks Consensus Estimate by that magnitude over the last three quarters. We have also seen earnings surprise move in tandem with management in one quarter, which currently stands at 0.0%.

The average remained positive at 20%.

Our Take

Wellpoint has a strong cash flow generation, strong membership growth prospects, leading market share positions, diversified product portfolio, proven track record of execution, attractive valuation, and consistency that would provide long term value to its investors. Meanwhile, WellPoint has been increasing its premiums and controlling costs.

Further, Wellpoint is well positioned among its peer group and has been strengthening its portfolio through its acquisition strategy, the synergies of which lead to margin expansion and topline growth. Moreover, the sale of its in-house pharmacy benefits business to Express Script will enhance a strong balance sheet and fuel a major stock repurchase.

However, given the headwinds that WLP and other health insurers’ face tied to the ongoing weak demand for their products and services and uncertainties related to implementation of health insurance reforms recently passed into law are expected to stretch profit margins.

Currently, Wellpoint carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.