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Analyst Blog

On Apr 2, 2013, shares of Coventry Health Care Inc. reached a 52-week high of $48.67.

Coventry reported positive earnings surprise in 3 of the 4 quarters in 2012, with an average beat of 12.2%. Further, our proven model shows that this healthcare company is likely to beat earnings in the first quarter of 2013 because it has a right combination of Positive Zacks ESP (Read: Zacks Earnings ESP: A Better Method) and Zacks Rank #2 (Buy).

ESP (Earnings Surprise Prediction), which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate is 9.09%. The Zacks Consensus Estimate for Coventry’s first quarter is currently pegged at 77 cents, representing a year over year increase of 24.7%.

Moreover, Coventry is improving its operating efficiencies through acquisitions and expansions. The impending takeover by Aetna Inc. , 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.

Further, with no debt repayment scheduled in the next couple of years, the company has ample scope for strategic acquisitions as well as share repurchases and dividend payouts. A strong balance sheet, efficient capital deployment and stable ratings are the other positives.

The valuation of Coventry looks stretched. Although the forward price-to-earnings ratio is higher than peers, the price-to-book value ratio lags peers and the return on equity of 8.9% is substantially lower than the peer group average of 12.3%. However, the 1-year return from the stock is 35.7%, much above S&P’s return of 11.5%.  

Other healthcare stocks worth considering are Health Net Inc. – Zacks Rank #1 (Strong Buy) and LCA-Vision Inc. – Zacks Rank #2 (Buy).

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