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We are reiterating our recommendation on the shares of Aetna Inc. (AET - Analyst Report) at ‘Neutral’ following third quarter earnings release. Although its quarterly performance was positive and the completion of its first major step to acquire Coventry Health Care Inc. (CVH) was encouraging, an uncertain business environment and difficult employment scenario keep us on the sidelines.  

Aetna has performed impressively in the first nine months of 2012. We expect the company to continue performing favorably over the long term given that it has made considerable investments in products and technology to extend its core health business and capitalize on exciting new consumer and provider opportunities that are emerging in the marketplace.
Recently, 78% of Coventry’s shareholders approved the company’s acquisition by Aetna. The acquisition will provide Aetna with direct access to two of the most exciting business lines – Government programs and Commercial insured business. We strongly believe that the transaction will generate long-term financial and strategic values for the acquiring company.

Aetna is also aiming at generating incremental fee revenues by managing infrastructure required for care organizations. Moreover, it is successfully diversifying its businesses internationally, which offers long-term growth profile. The company has also made a number of small as well as big acquisitions to poise itself for growth in the face of the fast changing health insurance marketplace.

Moreover, Aetna has a strong balance sheet with moderate leverage. Its also has a good capital management record through deployment of cash for acquisitions, share buyback and dividend payments.

However, limited 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 the company is facing at this moment.
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) and WellPoint Inc. (WLP - Analyst Report).

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