Stock Spotlight

Aetna healthier than its peers

Recent Price
$85
Dividend (estimated)
$0.90
Yield (estimated)
1.1%
P/E Ratio
13
Shares (millions)
365
Long-Term Debt as % of Capital
35%
52-Week Price Range
$85.72 - $60.32

A confluence of factors has contributed to Aetna ($85; AET) shares returning 20% this year. 

• Trends for health-care spending remain favorable, and the average S&P 500 Index managed-care stock has returned 15%.

• Aetna’s membership for its commercial plans surged 19% in the March quarter from a year earlier, easing concerns that employers would be quick to dump worker plans.

• The company has limited its exposure to the Affordable Care Act (ACA), expected to be a money-losing venture for many insurers this year.

For the year, Aetna is projected to grow per-share earnings 12%, versus the average of 2% for S&P 500 managed-care providers. Aetna’s profit estimates have risen over the past 90 days. Analysts expect Aetna’s sales to jump 20% in 2014, nearly double its peer-group average of 11%.

Despite strong share-price action and superior growth prospects, Aetna’s stock looks attractively valued at less than 13 times estimated 2014 earnings, while S&P 500 peers average 14. The stock is a Long-Term Buy.

Business breakdown

Aetna had 22.7 million members at the end of March, with more than 84% on commercial plans, 9% on Medicaid, and 7% on Medicare. The company expects membership to exceed 23 million by end of 2014, up 4% from the end of 2013.

In 2015, Aetna plans to raise premiums for plans under the Affordable Coverage Act by less than 20%. The company has struggled to keep members on the ACA exchanges,  though initial enrollment exceeded expectations. ACA exchanges account for less than 3% of Aetna’s medical membership.

Overall prescription volumes are rising, a trend Aetna attributes to new ACA coverage. The company has echoed comments made by other peers that utilization rates and medical costs for its core business remain steady. Utilization has yet to show much improvement from recession levels.

The medical-benefits ratio — health-care costs divided by premiums — has fallen in two consecutive quarters, easing pressure on Aetna’s profit margins. In the four quarters ended March, Aetna’s per-share profits rose  18% on sales growth of 39%. Cash from operations more than doubled to $3.16 billion, while free cash flow more than tripled to $2.38 billion.

Much of that growth reflects Aetna’s $7.3 billion purchase of Coventry Health Care in May 2013. The consensus projects the combined companies will boost revenue 9% in the second half of this year and 7% next year. The deal boosted Aetna’s exposure to Medicare and Medicaid programs. Aetna also inherited Coventry’s workers-compensation business and is reportedly exploring the sale of these assets, which could fetch up to $1.5 billion.

Conclusion

The stock yields 1.1%; management has raised the quarterly dividend more than 12% in each of the past four years. Favorable cash-flow trends signal Aetna is capable of another big hike this year.

An annual report for Aetna Inc. is available at 151 Farmington Ave., Hartford, CT 06156; (860) 273-0123; www.aetna.com.


 

Aetna

 
Quarter
Per-Share Earnings
Sales Change
Quarterly Price Range
P/E Ratio Range
Mar '14
$1.98
vs.
$1.56
47%
$76.71
-
$64.68
13 - 11
Dec '13
1.34
vs.
0.94
33%
69.47
-
60.32
13 - 11
Sep '13
1.50
vs.
1.55
46%
69.19
-
61.52
12 - 11
Jun '13
1.52
vs.
1.31
30%
64.13
-
50.40
12 - 9

 
Year (Dec.)
Sales (Bil.)
Per-Share Earnings*
Per-Share Dividend
52-Week Price Range
P/E Ratio Range
2013
$47.28
$5.85
$0.80
$69.47
-
$44.38
12 - 8
2012
36.60
5.13
0.70
51.14
-
34.58
10 - 7
2011
33.78
5.17
0.45
46.01
-
30.60
19 - 6
2010
34.25
3.68
0.04
35.96
-
25.00
10 - 7

 
Quadrix Scores†
Overall
Momentum
Value
Quality
Financial Strength
Earnings Estimates
Performance
97
70
84
85
37
87
85

* Earnings exclude special items. NM Not Meaningful.
† Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.

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