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Will Loss on Public Exchanges Mar Aetna's (AET) Q2 Earnings?

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Aetna Inc. (AET - Free Report) is scheduled to report second-quarter 2017 results on Aug 3, before the opening bell.

Last quarter, this health insurer surpassed the Zacks Consensus Estimate by 14.83%. In spite of higher costs associated with the termination of the merger agreement with Humana Inc. (HUM), the company displayed bottom-line improvement.

The company has a decent surprise history. Over the trailing four quarters, the company exceeded estimates on each occasion, delivering an average positive surprise of 8.62%. This is depicted in the graph below:

Aetna Inc. Price and EPS Surprise

Let’s see how things are shaping up for this announcement.

Q2 Flashback

Aetna’ results will continue to suffer from the ongoing losses in its Individual Commercial Affordable Care Act-compliant products sold on public exchanges. Consequently, the company has scaled back its footprint on many exchanges to reduce its risk exposure to these products. In the first quarter, revenues suffered from lower membership in the ACA compliant individual and small group products and the same is expected in the to-be-reported quarter.

Its commercial membership will also feel the strain as employers prefer to stay self-insured.

The company’s Government business which consists of Medicare and Medicaid is has been performing well for the past many quarters. With ever-increasing demand for these products from the growing population of baby boomers, we expect to see higher sales from this business in the to-be-reported quarter.

The company’s focus on managing costs will keep a check on its operating expenses. As a result of these cost-control initiatives, adjusted operating expense ratio declined in 2016 and through the first quarter of 2017. We expect the trend to continue in the second quarter, providing an extra cover to margins.

In the first quarter, Aetna resumed its share buyback which was terminated due to its planned merger with Humana. Share repurchases made by the company in the second quarter will help to lift its earnings.

Earnings Whispers

Our proven model does not conclusively show that Aetna is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. This is not the case here as you will see below.

Zacks ESP: Aetna has an Earning ESP of 0.00%. This is because the Most Accurate estimate of $2.34 per share is in line with the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Aetna carries a Zacks Rank #2 (Buy) which increases the predictive power of ESP. However, the company's 0.00% ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:  

Kellogg Company (K - Free Report) will report second-quarter 2017 earnings results on Aug 3. The company has an Earnings ESP of +2.17% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Intercontinental Exchange, Inc. (ICE - Free Report) has an Earnings ESP of +1.33% and a Zacks Rank #2. The company is expected to report second-quarter earnings results on Aug 3.

Financial Engines, Inc. (FNGN - Free Report) has an Earnings ESP of +4.00% and a Zacks Rank #2. The company is expected to report second-quarter earnings results on Aug 8.

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