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Following the release of third-quarter results on November 3, 2010, the majority of the analysts covering WellPoint Inc. (WLP) have made upward revisions to their 2010 and 2011 annual estimates. However, the fourth-quarter of 2010 witnessed more of a downward trend among the analysts over the last 30-day period.

Earnings Review
The company performed impressively in the third quarter, beating the Zacks Consensus Earnings Estimate by 16 cents, while lagging behind the year-ago earnings by 4 cents. The company raised its 2010 guidance for net income and medical enrollment expectation, while reaffirming its operating revenue outlook.

WellPoint’s earnings in the reported quarter were $1.74 per share, excluding net investment gains of 10 cents per share. On a reported basis, the company earned $1.84 per share as against the year-ago earnings of $1.53 per share. Higher-than-expected favorable reserve development and continued strong performance in administrative expense managementin the quarter contributed to the improved performance.

Earnings Estimate Revisions: Overview
Estimates are inclined more towards the positive side for the first quarter of 2011, the annual estimates of 2010 and 2011 for WellPoint, while they are somewhat neutral for the fourth quarter of 2010. It seems that the enrollment challenges will be partially offset by the favorable cost trend. The earnings estimate details are discussed below.

Agreement of Analysts
Over the last 30 days, 3 out of the 19 analysts covering the stock have nudged up their estimates for the fourth quarter of 2010. However, 10 of them have revised the same downward. For the first quarter of 2011, 5 out of 11 analysts revised their estimates upwards, while 3 of them estimated a falling trend.

Of the 16 analysts following the stock, 12 have raised their earnings estimates for fiscal 2010, and none implemented a downward revision over the last 30 days, owing to revised enrollment guidance for 2010. However, 2011 estimates witnessed a neutral outlook with 6 out of 21 analysts raising their estimates, while 5 analysts moved in the opposite direction, primarily attributable to an expected medical loss ratio (MLR) deterioration due to minimum MLR requirement and greater regulatory scrutiny on premium rate requests in 2011.

Magnitude of Estimate Revisions
For the fourth quarter, the estimates declined 4 cents over the past 30 days. On the contrary, the first quarter of 2011 witnessed a rise of 3 cents over the past 30 days, and an increase of 13 cents for fiscal 2010. Fiscal 2011 estimates increased only by a penny over the same period.

The upward trend shows WellPoint’s ability to maintain a strong capital position, compared to its peers, along with its continuous acquisition strategy. The decelerating estimates trend is expected to come from a declining medical enrollment, lower operating revenues and the impact of health reforms.

Our Recommendation
Currently, we have a Neutral outlook on WellPoint. While we are pleased with the strong results along with a solid capital management, we remain concerned about the health reform headwind.

Furthermore, the company relies on growth through acquisitions and is divesting non-core assets. It has completed many deals over the past few years. The sale of NextRx to Express Script (ESRX) in the fourth quarter of 2009 has strengthened its balance sheet and fueled a major stock repurchase. The acquisitions have in turn bolstered WellPoint’s financial standing with expanding margins.

However, the health reforms are expected to compress profit margins, going ahead. Moreover, concerns over continued high unemployment are likely to overshadow the stock.

Source: Earnings Scorecard: WellPoint