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WellPoint Beats Q4 Earnings Ests, Lags Y/Y

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WellPoint Inc. reported fourth-quarter 2013 adjusted income of 87 cents per share, beating the Zacks Consensus Estimate by a penny. However, adjusted income declined from the year-ago earnings of $1.03 per share.

Including net realized gains, other than temporary impairment losses on investments and impairment of intangible assets of 38 cents, WellPoint posted net income of 49 cents per share in the reported quarter compared with $1.51 per share in the fourth quarter of 2012. The year-ago quarter included some non-recurring items of 48 cents per share.

The year-over-year decline can be attributed to the 1-800 CONTACTS deal that included an impairment charge.

Operating revenues of WellPoint for the reported quarter were $17.6 billion that missed the Zacks Consensus Estimate of $17.8 billion. However, revenues rose 16.3% from the year-ago quarter. The improvement resulted from the integration of the Amerigroup business into the business model and higher Commercial and Specialty segment revenues, partly offset by a decline in Medicare revenues due to lower membership.

WellPoint’s premium revenues increased 17.3% year over year, administrative fees improved 2.0% and other revenues increased 29.3%. Meanwhile, total expenses increased 16.5% to $17.4 billion.

Medical enrollment of WellPoint decreased 1.3% to 35.7 million as of Dec 31, 2013, from 36.1 million as of Dec 31, 2012. The downside resulted from lower Commercial enrollment due to attrition in the National and Individual markets and decline in Medicaid and Medicare membership. However, growth in the Local Group business partially mitigated the decline.

WellPoint posted a benefit expense ratio (benefit expenses as a percentage of premium revenues) of 87.8% in the reported quarter, deteriorating 50 basis points from 87.3% in the fourth quarter of 2012. The deterioration was mainly due to higher benefit expense ratio in the Commercial & Specialty segment attributable to increasing usage of Individual products prior to the Affordable Care Act implementation, partially offset by an improvement in the Government segment that was fueled by enhanced California Medicaid operations and the repositioning programs at the Medicare Advantage.

Segment Results

Commercial & Specialty Business: This segment covers the Local Group, National Accounts, Individual and Specialty businesses. Operating revenues improved 1.9% year over year to $9.8 billion in the reported quarter.

Operating gains in the segment, however, declined 48.9% year over year to $250.1 million in the quarter, mainly due to higher SG&A expenses to accommodate changes related to the ACA implementation in the ongoing quarter

Government Business: This segment consists of the Medicaid and Medicare businesses, National Government Services, and the Federal Employee Program (FEP). Operating revenues climbed 40.9% year over year to $7.9 billion in the quarter under review.

Operating gains in the segment stood at $169.5 million in the reported quarter, rebounding from a loss of $40 million in the year-ago quarter. The improvement was due to the integration of the Amerigroup business and positive earnings momentum in the Amerigroup markets. Moreover, the improvement was driven by the absence of non-recurrent costs related to the Amerigroup acquisition in the fourth quarter of 2012.

Other: This segment comprises the unallocated corporate expenses as well as some businesses, which are not covered by the other two segments. Operating revenues in the quarter under review came in at $10.3 million, up 13.2% year over year.

Operating loss in this segment amounted to $0.2 million, narrowing from $24.7 million loss in the year-ago quarter. The improvement resulted from a decline in the unallocated corporate expenses.

Full Year Highlights

For full-year 2013, WellPoint recorded adjusted earnings per share of $8.52, up 12.7% from $7.56 in 2012. Full-year earnings were in line with the Zacks Consensus Estimate.

Operating Revenues increased 16% year–over–year to $70.2 billion. Total expenses on the other hand increased 16.6% year over year to $67.2 billion.

Financial Update

WellPoint exited 2013 with cash and cash equivalents of $1.6 billion, compared with $2.5 billion as of Dec 31, 2012. Operating cash flow in 2013 amounted to $3.1 billion, compared with $2.7 billion in 2012.

Long-term debt of WellPoint decreased to $13.6 billion as of Dec 31, 2013, from $14.17 billion as of Dec 31, 2012. Shareholder equity inched up to $24.8 billion from $23.8 billion, while total assets increased to $59.6 billion from $58.96 billion at the end of 2012.

Share Repurchase

WellPoint repurchased approximately 5.1 million shares for $449.8 million in the reported quarter. This amounted to an aggregate repurchase of 20.7 million shares for $1.6 billion or $78.08 per share in full-year 2013. As of Dec 31, 2013, WellPoint had approximately $3.7 billion worth of authorization remaining under its share repurchase program.

Dividend Update

During the reported quarter, WellPoint paid a quarterly cash dividend of 37.5 cents per share. This resulted in cash distribution of $110.5 million. For full-year 2013, the company paid cash dividends worth $448 million.

On Jan 28, 2013, WellPoint increased its quarterly cash dividend by 16.7% to 43.75 cents per share. This translates into an annual dividend of $1.75 per share. This increased dividend reflects a dividend yield of nearly 2%. Additionally, the company declared first-quarter 2014 dividend of 43.75 cents per share that will be paid on Mar 25, 2014, to shareholders of record as of Mar 10, 2014.

Outlook for 2014

WellPoint expects net income for 2014 to exceed $8.00 per share. Operating revenues are expected to increase to around $73 billion.

Zacks Rank

WellPoint currently carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Investors interested in the healthcare services industry may also consider stocks like VCA Antech Inc. , MEDNAX, Inc. (MD - Free Report) and LCA-Vision Inc. . While LCA-Vision carries a Zacks Rank #1 (Strong Buy), VCA Antech and MEDNAX hold the same Zacks Rank as WellPoint.

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