Aetna, Inc. (AET - Free Report) has been witnessing upward revisions over the last 60 days. The Zacks Consensus Estimate for 2017 and 2018 moved north by 6.1% and 2%, respectively.
The company’s continued investments to strengthen its position in a rapidly evolving health insurance industry and focus on being consumer centric are expected to drive performance.
In fact, Aetna surpassed estimates in each of the last four quarters, with an average positive earnings surprise of 19%.
Presently, Aetna carries a Zacks Rank #2 (Buy) with an impressive Value Score of B. Back-tested results show that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, handily outperform others.
Aetna’s share price performance also remains impressive. Its shares have gained 31.2% year to date, outperforming the industry’s growth of 27% as well as the S&P 500’s 11.6% returns.
Why is Aetna an Attractive Pick?
Increase in Earnings Guidance: Based on strong second-quarter earnings, which benefited from higher premium revenues and low medical cost ratios, the company upped its 2017 earnings guidance.
It now estimates earnings between $9.45 and $9.55 per share (versus the previous guidance of $8.80 to $8.90). The midpoint of this range represents a 15% increase from $8.21 per share in 2016. This strong earnings guidance instills confidence in the company’s ability to sail through stringent and uncertain regulations.
Bottom-Line Growth: Aetna’s earnings per share have grown since 2010 (save 2012 which saw a 0.2% decline). This has been achieved through growth in premium along with expense management and share buybacks. A strong guidance for 2017 is being viewed favorably by investors.
Cost Control: Aetna has been witnessing an improvement in adjusted operating expense ratio which testifies to its commitment to drive productivity and disciplined focus on managing operating costs. A decline in expenses has given a thrust to the company’s bottom-line growth.
Aetna expects 2017 adjusted expense ratio between 17.3% and 17.5% (versus the previous guidance of 16.9%). This increase will be driven by the rise in targeted growth-initiative investments. Despite the increase from the previous guidance, the targeted expense ratio for 2017 represents a year-over-year decline (calculated at mid-point) of 70 basis points.
Strong ROE: Further, Aetna’s trailing 12-month return on equity (ROE) of 20.5% reinforces its growth potential. Its ROE has increased in the past three years and is higher than ROE of 19% for the industry, reflecting is tactical efficiency in using shareholders’ funds.
Stock is Undervalued: Aetna’s valuation looks attractive at the current level. The company is currently trading at a one-year forward P/E ratio of 17.1, which is lower than 19.8 for the S&P 500 index and 19.4 for the industry.
Some other stocks from the space with the same Zacks Rank as Aetna are Centene Corp. (CNC - Free Report) , Magellan Health, Inc. (MGLN - Free Report) and WellCare Health Plans Inc. (WCG - Free Report) . You can see the complete list of today’s Zacks #1 Rank stocks here.
Centene beat estimates in three of the last four quarters with an average positive surprise of 7.7%. Also, the Zacks Consensus Estimate for 2017 and 2018 moved up 2.5% and 2.1%, respectively, in the last 60 days.
Magellan Health beat estimates in three of the last four quarters with an average positive surprise of 23.9%. Also, the Zacks Consensus Estimate for 2018 has moved up 3.7% in the last 60 days.
WellCare Health Plans beat estimates in each of the last four quarters with an average positive surprise of 47.4%. Also, the Zacks Consensus Estimate for both 2017 and 2018 moved up 1.7% in the last 60 days.
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