Time To Cash In Coventry Profits

| About: Aetna, Inc. (AET)

Coventry Health Care Inc.'s (CVH) third-quarter profit, while lower, beat analysts' average forecasts, and the company raised its full-year earnings guidance to the top of its previous range. Excluding charges related to its Aetna deal, Coventry posted earnings of 81 cents per share.

Net income was $105 million, or 78 cents per share, down from $122 million, or 83 cents per share, a year earlier. Operating revenue rose to $3.46 billion from $2.98 billion.

Coventry, whose large government healthcare business attracted Aetna, has struggled with its Kentucky Medicaid program for the poor, where it continues to spend more money on healthcare than it takes in from premiums. But it said it is raising premiums and that while the business is still challenging, it is improving.

Aetna announced plans in August to buy Coventry for $5.6 billion as part of a bet to expand more into government healthcare, which is expected to grow as the Affordable Care Act rolls into place.

Coventry forecast 2012 revenue of $14.06 billion to $14.07 billion. The company said it expects earnings of $3.25 to $3.30 per share for the year, including 6 cents of costs from the Aetna deal. The company previously forecast $3.10 to $3.30 per share.

Coventry said it added 66,000 new members during the quarter for a total of 998,000 in its Medicaid business, and made gains in Nebraska, Virginia and Pennsylvania. Revenue from the company's Medicaid business more than doubled to $730.9 million, as enrollment grew and the insurer started coverage last summer in Nebraska.

Coventry's Medicare prescription drug program for older people grew by 51,000 members to 1.55 million members; Medicare Advantage, where people enroll with a private company for their government-paid benefits, increased by 3,000 members to 256,000. The company's commercial risk business fell by 30,000 members during the quarter to 1.49 million members.

The insurer said its medical costs also climbed 22 percent to $2.67 billion. Selling, general and administrative expenses rose 6 percent to $521 million. Coventry's medical-expense ratio, or the percentage of premium revenue used to pay patient bills, was 84.4%, up from 81.5% a year earlier and down from 85.9% in the prior quarter. Total operating expenses climbed 19%.


On a short-term basis, Coventry is overvalued. On an absolute basis, the multiplier model valuations suggest Coventry is undervalued. The price-earnings ratio is 13.34 and the price-sales ratio is 0.44.


Investors should cash in profits made investing in Coventry. Aetna bought the firm at an undervalued level.

Disclosure: I am short SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.

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Tagged: , Health Care Plans, Earnings
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