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The Zacks Analyst Blog Highlights: Aetna, UnitedHealth Group, Citigroup, Bank of America and KeyCorp

AET UNH C BAC KEY

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For Immediate Release

Chicago, IL – December 14, 2012 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Aetna Inc. (AET - Analyst Report), UnitedHealth Group Inc. (UNH - Analyst Report), Citigroup Inc. (C - Analyst Report), Bank of America Corp. (BAC - Analyst Report) and KeyCorp (KEY - Analyst Report).

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Here are highlights from Thursday’s Analyst Blog:

Cautious Guidance from Aetna

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.

Citi in Legal Hassle Once Again

Litigation issues arising from mortgage securities are far from over for Citigroup Inc. (C - Analyst Report). The company is now entangled in a lawsuit filed by Swisscanto Asset Management AG for presenting distorted information regarding the company’s financial health between 2006 and 2009, according to a Bloomberg report. However, the damage amount has not been specified by Swisscanto.

The lawsuit, which was filed in the Manhattan federal court, particularly charged Citi and its former officers and directors of repeatedly providing misleading information to investors related to losses arising from the company’s mortgage securities. As a result, the complaints  ended up buying Citi securities at an exaggerated price.

Notably, related to the same claims, a class-action or group lawsuit is already pending in the Manhattan federal court. Swisscanto, however, requested to be excepted from the class. On the other hand, Citi planned to strongly oppose this lawsuit.

Citi, being hit hard by the impact of the financial crisis, had to seek refuge in government bailouts to stay afloat. Its market value significantly plummeted since the crisis and the company is still battling the aftermath of the crisis. Citi’s conduct related to mortgage securities has been questioned several times and the Swisscanto lawsuit has added to its woes.

However, owing to the litigation overhangs, Citi needs to engage its resources to resolve them. This consequently increases legal costs, compelling the company to opt for settlements. Yet, this in turn exhausts the company’s financials, which could have been steered towards its growth initiatives, had it not been subject to such litigations.

Citi, otherwise, boasts an impressive global footprint and attractive core business. The company has restructured its business and overhauled its risk management. It is reducing its risky exposures by trimming the problem assets, which in turn frees up capital to be invested in its core business.

Moreover, to rightsize its business and increase efficiency across the organization, the company has recently announced significant layoffs. While such efforts are encouraging, the low interest rate environment, regulatory headwinds and litigation risks remain our concerns.

Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we have a long-term Neutral recommendation on the stock. Among its peers, Bank of America Corp. (BAC - Analyst Report) and KeyCorp (KEY - Analyst Report) also have a Zacks #3 Rank.

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