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We are reiterating our Neutral recommendation on the shares of Aetna Inc. (AET - Analyst Report) prior to its second quarter earnings release scheduled on July 31, 2012, before the opening bell.  The Zacks Consensus Estimate of earnings is pegged at $1.26 per share, indicating a year-over-year decline of 6.6%.

Though Aetna’s earnings fell short of the Zacks Consensus Estimate in the previous quarter, we expect it to record top-line growth going forward. The company has made considerable investments in products and technology, with the intention of extending its core health business and capitalize on exciting new consumer and provider opportunities emerging in the marketplace. Aetna's strong operating results and significant capital generation will enable it to make further investments.

We expect the company to continue performing well in 2012 backed by the performance of the Medicaid and Medicare segments, fast growing health services segment, an expanding provider network and a strong balance sheet.

Aetna is aggressively expanding its reach in the Medicare business. The lifting of the Centers for Medicare & Medicaid Services (CMS) sanctions in June last year 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, both growing challenges as baby boomers enter the Medicare program.

Aetna is also 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 the 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 four significant acquisitions, repurchase 45 million shares and institute a meaningful shareholder dividend.

However, membership growth, restriction on premium rate increase, an increase in medical costs expected in 2012 and a low interest rate environment are some of the headwinds facing the company.

Aetna currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Some of its peers within our coverage who also retain a Zacks #3 Rank and a long-term Neutral recommendation, include Cigna Corp. (CI - Analyst Report), WellPoint Inc. (WLP - Analyst Report), Humana Inc. (HUM - Analyst Report) and CVS Caremark Corp. (CVS - Analyst Report).

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