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Cautious 2013 Guidance from Aetna

AET UNH

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Health insurer Aetna Inc. (AET - Analyst Report) expects its 2013 earnings per share to be at least $5.40, below the Zacks Consensus Estimate of $5.52 per share. The conservative guidance from the company comes on the back of increasing medical costs and weak enrollment.

Based on the fourth quarter 2012 performance till date, including actual results of October and November 2012, Aetna reiterated its earlier full-year 2012 EPS expectation of $5.10. The Zacks Consensus Estimate for 2012 is currently pegged at $5.15, modestly higher than the company’s guidance.

Revenues for the full-year 2012 are projected to be approximately $35.5 billion, and full-year 2013 revenues are projected to grow approximately 9% compared with 2012.

The guidance excludes the positive accretion anticipated from the Coventry acquisition, which is likely to close next year.

Aetna has been benefiting from low medical utilization for the last couple of years. However, it expects that the trend will reverse to normal levels resulting in higher medical costs.

Aetna, the third-largest U.S. health insurer by membership, expects 2012 year-end membership of 18.2 million, with enrollment remaining unchanged through the first quarter of 2013. By the end of 2013, membership is expected to reach about 18.4 million.

The company also estimates 2012 share buybacks to total $1.4 billion.

Health insurers are becoming very cautious as the year 2013 is expected to present a number of headwinds – regulatory as well as economic.  However, in our point of view, the company is being overly precautious in providing its earnings guidance. It is following the trend of peer UnitedHealth Group Inc. (UNH - Analyst Report), which also provided a narrow outlook last month. It expects 2013 earnings estimates in the range of $5.25–$5.50 per share, on revenue of $123–$124 billion.

Despite the moderate guidance, we believe that the company will surprise investors on the back of a number of tailwinds – positive accretion from the Coventry acquisition; growing Medicare and Medicaid; share buyback; earlier deals made in 2011 adding incremental earnings, which will overshadow headwinds such as a weak commercial membership growth, low investment income, higher expenses due to investments in the Accountable Care Solutions and exchanges.

Till we get more shades on Aetna’s 2013 earnings we would continue maintaining our long-term ‘Neutral’ recommendation on the shares. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
 

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