A Clean Bill of Health by Jonathan R. Laing
Summary: Despite a 16% jump in Q1 EPS and raising its 2007 guidance from $5.53 to $5.54/share, 15% more than last year, health insurer WellPoint (WLP) fell from around $84 to $79 mid-April, back to Friday's $81.43. Possibly because of a sudden rise in the claims-to-premiums ratio, or from presidential election rhetoric targeting ballooning healthcare costs and promoting universal medical coverage. Bulls say WLP could rise 20% because of: 1) WLPs diversified customer base of government, corporate and individual policyholders. 2) A steady, projected 8% revenue growth as medicine advances and costs rise for aging baby boomers. 3) As the largest U.S. health insurer, operating costs stay low through better terms with doctors, hospitals and pharmaceuticals, and streamlining—Q1'07 expenses were down 1.5% from Q1'06. 3) Huge cash flows ($4.4 billion for 2006) vs. just $325 million in capital spending leaves money for WLP's current $3b share buyback program and acquisitions. 4) WLP's 12.7 P/E of $6.39/share is discounted. 5) HMO's like WellPoint, United Health Group (UNH) and Humana (HUM) are so integrated in federal health programs that a sea change is unlikely. 6) Successful programs like inexpensive drugs for seniors. 7) New CEO Angela Braly's creativity and legal background could help if government overhauls healthcare.