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We have reiterated our Neutral recommendation on Coventry Health Care Inc. based on the fluctuations in operating cash flow and high competition, which are expected to weigh on the positives. This managed healthcare company carries a Zacks #3 Rank (Hold).

Why Reiterate?

The Zacks Consensus Estimate for Coventry’s fourth quarter 2012 remained stable at 67 cents per share over the past 30 days due to the lack of any estimate revision. This estimate reflects a 15.5% increase over the fourth quarter of 2011.

Even the 2012 estimate was not revised by any analyst during the past 30 days. Consequently, the Zacks Consensus Estimate for 2012 stands at $2.80 per share, down 2.5% over 2011. This estimate lies below Coventry’s earnings per share guidance of $3.25–$3.30.

The company had raised its 2012 earnings guidance from $3.10–$3.30 during its third-quarter earnings release on October 26, 2012. Coventry reported third-quarter 2012 operating earnings per share of 78 cents, which surpassed the Zacks Consensus Estimate of 72 cents, but was lower than the prior-year earnings of 83 cents.

The operating cash flow of Coventry remains unstable, which could weigh on the capital and financial leverage. Additionally, the company has to compete with peers that have competitive advantages such as broader geographical coverage, greater market share, lower costs and greater resources. These can negatively impact Coventry’s membership and earnings.

However, these negatives are mitigated by various positives. Coventry’s takeover by Aetna Inc. (AET - Analyst Report), scheduled to close by mid-2013, will allow the company to cater to a larger market and open avenues for future partnerships to improve the quality and affordability of its services.

Moreover, with no debt repayment scheduled in the next couple of years and deployable cash of about $850 million at the end of September 2012, the company has ample scope for strategic acquisitions as well as share repurchases and dividend payouts.

Other Stocks to Consider

While we maintain a cautious stance on Coventry, other health care plan providers such as Health Net Inc. (HNT - Analyst Report) and Molina Inc. (MOH - Analyst Report) are worth considering. Both these stocks carry a Zacks #2 Rank (Buy).

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