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Aetna Continues to Grow Business, Merger Remains Uncertain

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On Dec 27, we issued an updated research report on Aetna Inc. .

Aetna has come into the spot light recently owing to its pending merger with Humana Inc. (HUM - Free Report) . The deal, however, has been sued by the U.S. Department of Justice (DoJ) on grounds that the merger would restrict competition in the U.S medical insurance market. The DoJ has also objected the joint decision of Aetna and Humana to sell certain MA assets to Molina Healthcare Inc (MOH - Free Report) . Though the duo referred to divestment as a “Good Business” move, the DoJ alleged that the asset sale was meant to shove its underperforming businesses to Molina and not just for the sake of business growth. Along with the Aetna-Humana merger, the Justice Department sued the merger between Anthem Inc. and Cigna Corp. (CI - Free Report) on similar grounds.

 The antitrust trial of Aetna-Humana merger closed last week. The  judge's decision on whether to allow the deal to proceed is expected to come by January. In case of a favorable ruling, the merger will be closed by Feb 15, 2017. The deal, which was originally slated to be closed in June last year, has been delayed and is still shrouded in uncertainty.

Since the aforesaid litigation, shares of Aetna have been losing value. The stock has gained only 6.5% since Jul 21, whereas the Zacks categorized HMO industry has gained 10.7%. Cessation of share buyback owing to the pending merger has also contributed to this share price depreciation. Hence, it is not surprising that shareholders’ confidence on the stock has also been affected.

PRICE CHART SINCE JUL 21, 2016

Nevertheless, Aetna’s relentless efforts in transforming the Health Care System via accountable care organizations impress. More than 40% of its medical spending is generated through some form of value-based care model. The company believes that it will be able to increase the share of such spending to 75% by 2020. In order to accomplish its target, the company ties up with numerous health care providers to increase its value-based care offerings.

The company’s healthy balance sheet with historically high reserve strength, RBC ratio of approximately 550% and parent cash of $2.3 billion at the end of third quarter 2016 indicates its operational efficiency. The company projects excess cash flow of up to $2.4 billion for 2016.

Declining operating expense ratio in the first nine months of 2016 reflects its strong commitment to managing its operating costs. Management expects operating expense ratio to be approximately 18% for 2016, lower than that of 2015 and 2014. This reduction in expenses is expected to drive the company’s margin expansion.

Aetna is aggressively expanding its reach in the fast growing government businesses. Management expects the government business to add 20 cents to 25 cents per share to the company’s bottom line in 2016. Aetna is also expanding aggressively in the international markets with its second-highest exposure to international business.

Aetna enjoys competitive leverage and a strong enterprise value by virtue of its brand name. We expect such positives to helps it survive in the market despite the challenges it currently faces.

Zacks Rank

Aetna presently holds rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Humana Inc. (HUM) - free report >>

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