Dark Clouds Hang Over WellPoint

“WellPoint reaffirmed their 2010 guidance, but please note that excludes any kind of health care reform. If we get a big health care package, that would change the guidance.” — CNBC’s Squawk on the Street 3/17/2010

Healthcare investors and investors in general must pay attention to the daily news flow out of Washington because the outcome of ongoing healthcare reform will have a substantial impact on a sizable portion of the US economy. On this blog, we aim to remove politics from the discussion and rather focus on financial matters, but in the case of healthcare the two are undeniably linked. No sector will be more impacted by healthcare reform than insurance plan providers such as WellPoint, United Healthcare, and Aetna.

Today, one such HMO provider, WellPoint (WLP), reaffirmed its fiscal 2010 guidance, which shows fundamentally speaking the stock looks quite cheap compared to historical norms. They expect earnings per share to come in above $6, as share repurchases will neutralize what is expected to be an 11% decline in net income. America’s largest managed-care company by membership also forecast revenue of $59 billion which tops the consensus of Wall Street analysts’ estimates of $58.2 billion, but it does fall short of the $60.8 billion in sales last year. A sluggish labor market is cause of a major headwind for the company, and they see a loss of around 400,000 members through the rest of the year.

As HMO’s come under fire from politicians, WellPoint anticipates raising the percentage of premiums to pay member medical costs this year to 84.3%, an increase of 1.7% over last year. They anticipate medical costs may escalate by up to 8% this year, which will make raising premiums all but a necessity despite the political environment. Obviously, there are very significant headwinds facing the company, even without the prospect of a healthcare overhaul. So, it is no surprise that the uncertainty weighing on these stocks will cause a depressed valuation, but according to our methodology WLP has the most depressed valuation of the entire group. The stock currently trades at a price-to-sales multiple of .46x, which is well below the historically normal range of .61x to .98x. Similarly, on a price-to-cash earnings basis, WLP has normally traded for 12.1x to 19.7x, but at the current valuation the market only trades at just over 8x cash earnings.

According to our methodology, this stock could be a major benefactor should healthcare reform derail, and under normal circumstances this stock as well as many in the Health Insurance industry would be considered Undervalued. However, betting on or against the political will in Washington is far more akin to speculation than it is to a sound long term investing strategy. Make no mistake, there is a reason that these HMO stocks are valued the way they are, but if you think reform will not pass and can stomach the risks, WLP may be the best way to play it.

Dark Clouds Hang Over WellPoint

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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1 Comment on Dark Clouds Hang Over WellPoint

  1. Interesting. Yet today when it seems likely that this stinking bill will pass, Wellpoint stock is UP!

    Having 32 million captive “customers” added to the pool would seem to be a net gain for insurers, no?

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