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What's in the Offing for Aetna (AET) This Earnings Season?

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Aetna Inc. is scheduled to announce third-quarter 2018 results on Oct 30, before the opening bell.

The company is expected to gain from the projected increase in net income and adjusted earnings, resulting from lower taxes, strong growth in individual Medicare Advantage products and group Medicare Advantage products. This should be, partly offset by lower membership in administrative service contracts products and increase in expense ratio.

Factors to Influence Q3 Results

Increase in Revenues: The company is expected to witness an increase in revenues due to membership growth in Medicare products, adoption of new accounting guidance related to revenue recognition, effective in the first quarter of 2018, and favorable impact of reinstatement of the health insurer fee for 2018.

Membership Decline: Membership should reflect a decline in Aetna's Commercial Insured products, primarily related to individuals compliant with Affordable Care Act, and small group products and declines in its Medicaid products, partially offset by growth in its Medicare and Administrative Services Contracts products.

Gains from a Lower Tax Rate: As a result of the Tax Cuts and Jobs Act of 2017, which was effective in December 2017, Aetna projects its corporate income tax rate liability to decline. Aetna estimates the tax reform to increase gross adjusted earnings for 2018 by approximately $800 million, of which at least 50% is likely to accrue to adjusted earnings. Thus, the tax reform should benefit the company’s margins in the third quarter.

Increase in Expense Ratio: The reinstatement of health insurer fee for 2018 must have led to an increase in expense ratio, which measures costs incurred per dollar of premium earned.

Earnings Surprise History

The company boasts an attractive earnings surprise history, having surpassed estimates in each of the trailing four quarters, with an average positive surprise of 11%. This is depicted in the chart below:

Aetna Inc. Price and EPS Surprise

Here's What Our Quantitative Model Predicts:

Our proven model does not show that Aetna is likely to beat on earnings in the to-be-reported quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Earnings ESP: The company’s Earnings ESP is 1.06%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Aetna currently carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies that you may consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Anthem, Inc. is slated to release third-quarter earnings figures on Oct 31. This stock has an Earnings ESP of +1.69% and a Zacks Rank #2.

 You can see the complete list of today’s Zacks #1 Rank stocks here.

Molina Healthcare, Inc. (MOH - Free Report) has an Earnings ESP of +3.76%. This #1 Ranked company is set to report third-quarter earnings on Oct 31.

Humana Inc. (HUM - Free Report) is set to report third-quarter 2018 earnings performance on Nov 7. The stock has an Earnings ESP of +2.22% and a Zacks Rank of 2.

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