Sector: Healthcare
Industry: Health Care Plans
Key Statistics
 

After widening its range of insurance offerings, higher enrollment levels enabled the third largest health insurer to match earnings expectations in the fourth quarter.

Aetna, which provides health care, dental, pharmacy, group life, disability, and long-term care benefits in the United States, typically delivers an upside beat - a fact that prompted some profit taking Thursday.

Further, it issued in-line first quarter guidance as lower group insurance earnings and healthcare tempered improvements in larger-case pension earnings. Indeed, disappointing enrollment - especially in the commercial environment - has plagued managed care companies recently.

The company's operating margin, excluding reserve development, was 10.6% for the fourth quarter of 2006, compared with 10.7% for the fourth quarter of 2005, pre-tax.

The longer-term outlook for the company and its stock remain good, however, and this is where we're putting our focus. For the full-year 2007, the company projected operating earnings to be $3.30 per share, an increase from our prior guidance of $3.26. At about 15% growth year over year, that's a bit more ambitious than consensus of earnings per share of $3.26, which equals 11.4% growth.

Launch of Medicare Part D Has Been a Boon for Business

The official launch of the Medicare Part D drug prescription plan took place on Jan. 1, 2006. Under the program, Medicare helps pay for medications for senior citizens. While the launch of the program boosted the stock prices of many Health Care-related issues, managed care companies such as AET or competitors Humana Inc. and UnitedHealth Group benefited most. However, unlike HUM, AET hasn't made Medicare the absolute center of its growth strategy. 

According to AET's records, Medicare premiums increased approximately $217 mln and $586 mln for the three and nine months ended Sept. 30, respectively, when compared to the corresponding periods in 2005.

Going forward, these numbers are expected to grow. AET is also working to extend the reach of its most profitable programs into more states. Starting in January, for example, the company for the first time expanded its Medicare product offerings to all 50 states. Overall enrollment in AET's insurance plans increased on average by 2.5% per share since 2002.

In the meantime, AET has a history of supporting its stock price by repurchasing shares. AET repurchased 8.7 mln shares at a cost of $366.3 mln in the fourth quarter of 2006.

The stock looks attractive at current levels. Both the company's operating margin and gross margin are better than industry averages; yet at about 16.4x trailing 12-month earnings, the stock is trading at a discount to its 10-year average of 19.3x and the industry average of about 18.4x. Furthermore, given double-digit growth rates, and sector defensive characteristics, we continue to hold an Overweight rating on the Health Care Sector overall.

--Christine Marie Nielsen, Briefing.com