Aetna Stays Outperform

We reiterate our Outperform recommendation on the shares of Aetna Inc. ( AET - Analyst Report ) , prior to the release of its first-quarter earnings scheduled on April 25, 2012, on the basis of its better-than-average operating fundamentals and expected strong performance in 2012.

The company recorded an impressive performance in 2011, with an increase in membership, revenues, operating margins and cash flow on the back of low medical utilization, pricing discipline, medical cost management strategies and cost control initiatives. Aetna also made significant strategic investments in acquisitions and technologies, with the intent to extend its core health business and to capitalize on exciting new consumer and provider opportunities in the marketplace.

Aetna has done well in its Medicare business. The lifting of the Center for Medicare and Medicaid Services (“CMS”) sanctions in June and the acquisition of Genworth's Medicare Supplement business has advanced its Medicare platform. Aetna is focused on developing solutions that help retirees manage their health and employers manage their expenses.

Aetna is looking to generate incremental fee revenues by managing the infrastructure necessary for care organizations.

With respect to Aetna’s international business, the product launches in China, earlier during the year, met with initial success The company also entered the Indian market with the acquisition of Indian Health Organization. These are indicative of Aetna’s efforts to expand its global footprint and develop new business models.

Aetna has made a number of acquisitions in its Commercial business such as Prodigy. Prodigy's highly-customized offering addresses a portion of the self-funded market, covering approximately 27 million lives. Additionally the company also acquired PayFlex, an administrator of Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs) and other accounts that support consumer-based health plan designs.

Aetna’s balance sheet is quite strong with a moderate leverage. Its excess cash generation in 2011 enabled it to complete 4 significant acquisitions, repurchase 45 million shares and institute a meaningful shareholder dividend.

However, some uncertainties regarding the final outcome of the Health Care Reform, higher expected utilization in 2012 and a low interest rate environment are some of the headwinds faced by the company.

Aetna currently retains a Zacks #1 Rank, which translates into a short-term Buy rating. The health insurer competes with other carriers such as UnitedHealth Group Inc. ( UNH - Analyst Report ) , CIGNA Corp. ( CI - Analyst Report ) , WellPoint Inc. ( WLP - Analyst Report ) and Humana Inc. ( HUM - Analyst Report ) .