Aetna Reiterates its Guidance

U.S. health insurer, Aetna Inc. ( AET - Analyst Report ) has reaffirmed its previously issued operating guidance.

Aetna continues to see 2012 EPS of $5.10; for 2013 earnings per share is a minimum of $5.40. The Zacks Consensus Estimates earnings are $5.15 and $5.51 per share for 2013 and 2013 respectively.

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

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.

With respect to medical costs trend, Aetna maintains its full-year 2012 Commercial medical cost trend projection of 6.5% with the same level to be maintained in 2013.

The company also provided a status update on its pending Coventry Health Care, Inc.’s acquisition. As of January 4, 2013, Aetna had received 17 out of the 21 state approvals for the proposed acquisition.

Aetna continues to believe that 2013 operating fundamentals will be challenged to some extent by increasing medical costs and weak enrollment. Health insurers overall 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 for 2013. 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. These include positive accretion from the Coventry acquisition; growing Medicare and Medicaid; share buyback; with earlier deals made in 2011 adding incremental earnings. These in turn 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 (Hold).