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Will a Decline in Membership Mar Aetna's (AET) Q2 Earnings?

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Aetna Inc. is scheduled to announce second-quarter 2018 results on Aug 2, before the opening bell.

The company is expected to gain from the projected increase in net income and adjusted earnings resulting from lower taxes, strong growth in individual Medicare Advantage products and group Medicare Advantage products, as well as lesser losses from exiting Individual Commercial products in 2018.

Factors to Influence Q2 Results

Membership Decline: Membership should reflect a decline in Aetna's Commercial products primarily related to Affordable Care Act compliant individual and small group products and declines in its Medicaid products, partially offset by growth in its Medicare products.

Gains from Lower Tax Rate: As a result of the Tax Cuts and Jobs Act of 2017, which was effective in December 2017, Aetna projects its corporate income tax rate liability to decline. Aetna estimates that the tax reform will push upgross 2018 adjusted earnings by approximately $800 million, of which at least 50% will accrue to adjusted earnings. Thus the tax reform should benefit the company’s margins in the second quarter.

Reduced Loss From Pubic Exchange Business: Aetna suffered losses on its public exchanges business in 2017 and 2016. Lackluster results have forced the company to substantially reduce its risk exposure to these products for 2017. The company has significantly reduced its exposure to Individual Commercial products for 2018. The curtailment of this business will help in reduction of losses.

Revenues to Remain Under Pressure:  Aetna's revenues are expected to remain under pressure in 2018 owing to the sale of its domestic group life insurance, group disability insurance and absence management business lines; the previously disclosed Medicaid contract termination; exits from Individual Commercial products and continued repositioning of its ACA compliant small group Commercial products.

Earnings Surprise History

The company boasts an attractive earnings surprise history, having surpassed estimates in each of the trailing four quarters, with an average positive surprise of 19.61%. This is depicted in the chart below:

Aetna Inc. Price and EPS Surprise

Aetna Inc. Price and EPS Surprise | Aetna Inc. Quote

Here is what our quantitative model predicts:


Our proven model does not show that Aetna is likely to beat on earnings in the to-be-reported quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. This is not the case here as you will see below:  

Earnings ESP: The company’s Earnings ESP is -0.17%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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

Stocks to Consider

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:  

DaVita Inc. (DVA - Free Report) is expected to report second-quarter 2018 earnings results on Aug 1. The company has an Earnings ESP of +0.86% and a Zacks Rank #2 (Buy).

PRA Health Sciences, Inc. (PRAH - Free Report) is expected to report second-quarter earnings results on Aug 1. It has an Earnings ESP of +2.13% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Express Scripts Holding Company (ESRX - Free Report) has an Earnings ESP of +0.46% and a Zacks Rank #3. The company is expected to report second-quarter earnings results on Aug 1.

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