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On Apr 23, 2013, we upgraded Coventry Health Care Inc. to Outperform based on strong fundamentals, reflected by higher revenues, strong balance sheet, efficient capital deployment and stable ratings. Moreover, this Zacks Rank #2 (Buy) company is improving its operating efficiencies through acquisitions and expansions.

Why the Upgrade?

Coventry’s imminent takeover by Aetna Inc. (AET - Analyst Report), scheduled to close by mid-2013, is projected to be beneficial for the company. Aetna is a comparatively larger company than Coventry with a stronger market position and higher credit rating.

Moreover, Coventry uses its free cash for share repurchases and acquisitions, thereby improving the bottom line. The company repurchased 9.9 million shares for $328 million in 2012, thus leaving 6.5 million shares under its existing repurchase authorization as on Dec 31, 2012.

Further, the improved sales and the retention process implemented since 2009 has transformed Coventry’s Commercial Risk business into a profitable one. The business contributed 41% of the total operating revenue in 2012. Going ahead, the business is likely to continue contributing to the company’s earnings.

Coventry reported positive earnings surprise in 3 of the 4 quarters in 2012, with an average beat of 12.2%. The company is expected to report its first-quarter earnings before the opening bell on May 1, 2013. The Zacks Consensus Estimate for Coventry’s first quarter is currently pegged at 79 cents, representing a year-over-year increase of 26.8%.

Other Stocks to Consider

Other health maintenance organizations worth considering are Health Net Inc. (HNT - Analyst Report) – Zacks Rank #1 (Strong Buy) and WellCare Health Plans Inc. (WCG - Snapshot Report) – Zacks Rank #2 (Buy).

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