Earnings Preview: WellPoint

WellPoint Inc (WLP) is scheduled to report its fourth quarter and fiscal year 2010 results before the market opens on January 26, 2011. The Zacks Consensus Estimate for the fourth quarter is $1.21 per share, representing a growth of about 4.3% over the year-ago quarter. The Zacks Consensus Estimate for fiscal 2010 is $6.59 per share, representing a growth of about 8.2% over the year-ago quarter.

WellPoint expects serious impact from health reforms, and believes that insurers like WellPoint will be required to spend certain percentages of premiums on medical care or offer rebates to consumers.

Previous Quarter Performance

Wellpoint’s third-quarter operating earnings came in at $1.74 per share, down from the year-ago quarter of $1.78 per share. However, they surpassed the Zacks Consensus Estimate of $1.58 per share.

The improved showing was attributable to higher-than-expected favorable reserve development and continued strong performance in administrative expense management.

Total operating revenue for the quarter came in at approximately $14.3 billion, a 5.2% year-over-year decline. Almost 40% of this decline was attributable to the conversion of the large municipal group to a self-funded arrangement during the second quarter.

The remaining decrease resulted from lower fully insured membership due to economic conditions and transfer of the UniCare business in Texas and Illinois. The sale of the NextRx subsidiaries by Wellpoint to Express Scripts Inc. (ESRX) in late 2009 also contributed to the decline.

Medical membership declined 1.1% year over year to approximately 33.5 million as of September, 2010.

Outlook for 2010

Wellpoint had expected its earnings guidance to exceed $6.00 per share (excluding special items) in fiscal 2010. WellPoint had previously stated that it expected to earn at least $6.60 per share. As per the company, its 2010 earnings would include an investment gain of 18 cents per share, partially offset by an asset impairment charge of 3 cents per share.

Operating revenue for fiscal 2010 was re-affirmed at $58.0 billion. WellPoint’s medical membership at the end of fiscal 2010 was projected to be 33.3 million as opposed to an earlier projection of 33.1 million.

The benefit expense ratio was expected to be approximately 83.7% with the selling, general, and administrative (SG&A) expense ratio at approximately 14.9% for fiscal 2010, as against the earlier projection of 83.9% and 14.8%, respectively. WellPoint has projected an operating cash flow in fiscal 2010 to exceed $1.2 billion,including the unfavorable impact of $1.2 billion of tax payments in the first quarter related to the sale of NextRx.

Earnings Estimate Revisions – Overview

Ahead of the earnings release, we can see minor variation in analyst estimates over the past 7 and 30 days. The estimate revision trends show positive sentiments in Wellpoint, implying that the analysts do see a meaningful catalyst for the time being.

Agreement of Analysts

In the last 7 days, only 1 of the 20 analysts covering the stock has raised the estimates for the fourth quarter of 2010. However, 4 of them have nudged up their estimates in the last 30 days. No downward revisions were witnessed during this period. For the fiscal year 2010, 4 analysts have increased their estimates in the past 30 days.

On the other hand, none of the analysts out of 12 has moved their estimates for the first quarter of 2011 over the last 7 as well as 30 days. Only 1 analyst out of 23 has increased itsestimate in the last 30 days for fiscal 2011, and only 1 analyst has reduced its estimates during the past 7 and 30 days in fiscal 2011, implying that the analysts foresee downward pressure on the stock.

We believe that the analysts have upgraded their estimates on the back of WellPoint’s higher pricing and the loss of higher-cost Medicare and Medicaid members. Further, they are expected to remain impressed with WellPoint’s efforts to increase its effectiveness in cost-control and claims processing.

Magnitude of Estimate Revisions

Over the 7-day period, the analysts have shown upward movement from $1.19 to $1.21 in the fourth quarter of 2010 as seen from the magnitude of the Consensus Estimate trend, while estimates remain unchanged for the first quarter of 2011 at $1.88 and $6.59 for fiscal year 2010.

Estimates for fiscal 2011 moved down by five cents from earnings of $6.63 per share to $6.58. Therefore, the analysts expect WellPoint to report in line with their estimates.

Over the 30-day period, the analysts have nudged up their fourth quarter and fiscal year 2010 estimates both by three pennies from $1.18 to $1.21 per share and from $6.56 to $6.59 per share, respectively. Estimates, however, remained unchanged for the first quarter of 2011 and declined from $6.62 to $6.58 per share for fiscal 2011.

The declining estimates trend in 2011 is expected to come from WellPoint’s higher commercial medical costs and unexpectedly low Medicare revenue. Moreover, the analysts are concerned that the Medical cost ratio requirements related to the health reform will be in effect in fiscal 2011, and will adversely affect the bottom line of WellPoint.

Earnings Surprise

Considering earnings surprises, the stock has been almost steady over the last four quarters. We have seen positive surprises in the last four quarters, which imply that the company has beaten the Zacks Consensus Estimate by that magnitude in those four quarters.

The average remained positive at 12.10%.

Our Take

WellPoint has a strong cash flow generation, strong membership growth prospects, leading market share positions, diversified product portfolio, proven track record of execution, attractive valuation, and consistency that would provide long-term value to its investors. Meanwhile, WellPoint has been increasing its premiums and controlling costs.

Further, WellPoint is well positioned among its peer group and has been strengthening its portfolio through its acquisition strategy, the synergies of which will lead to margin expansion and top-line growth. Moreover, the sale of its in-house pharmacy benefits business to Express Script will strengthen its balance sheet and fuel a major stock repurchase.

However, we believe that WellPoint remains wary of the impact of the health insurance reforms and expects these reforms to increase unemployment and stretch profit margins of WellPoint and its competitors. The resulting downward pressure is likely to overshadow the stock.

Currently, WellPoint carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.

WELLPOINT INC (WLP): Free Stock Analysis Report

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