WellPoint Still On Point

By Stephen D. Simpson, CFA | April 30, 2010 AAA

The health insurance industry has seen more than its usual share of turbulence over the past year, what with the healthcare reform debate and seemingly mandatory attacks on the health insurance industry. Through all of that, WellPoint (NYSE: WLP) has continued to run its business exceptionally well.

IN PICTURES: Eight Ways To Survive A Market Downturn

Results That Get Better As You Go Along
Admittedly, top line growth is not a preeminent reason to own WellPoint shares. For the first quarter, the company saw revenue drop a fraction of a percent, while operating revenue was down about 3%. The economy is primarily responsible for this; with rising unemployment, the company saw premium revenue drop about 2% on a similar decrease in membership. (For more, see Intro To Insurance: Health Insurance.)

Benefit expenses were also lower, though, and this was a positive development. Last year's flu epidemic may have been a boon to testing companies like Quidel (Nasdaq: QDEL) and vaccine companies like Sanofi-Aventis (NYSE: SNY) and GlaxoSmithKline (NYSE: GSK), but the mild flu season this winter helped keep a lid on WellPoint's costs. Given that WellPoint pays out more than 75% of its revenue in benefits, even a modest drop like this quarter's 70 basis point decrease is helpful.

Other expense items were likewise well-controlled, and total expenses dropped a bit more than 3%. None of that sounds too exciting until you consider how leveraged this company is to small expense improvements. That modest decline in expenses led to a 49% increase in pretax income and, combined with a 10% decrease in shares outstanding, a 69% increase in earnings per share (EPS).

WellPoint May Need To Walk Softly
The fact that the healthcare reform bill passed does not mean that health insurance companies are off the hook or no longer a target. I think this may be one of the main reasons the company did not lift its guidance. Why do anything to attract the attention of those who would point to that as proof of WellPoint being a modern day "robber baron"?

Likewise, both WellPoint and rival UnitedHealth (NYSE: UNH) announced that they would end their policies on rescission well ahead of the federal deadline. Put very simply, rescission is a process whereby healthcare companies could terminate the coverage of policyholders (ostensibly for fraud, but often seen as targeting sick policyholders). Coming on the heels of accusations that WellPoint was using algorithms to identify and drop women recently diagnosed with breast cancer, it is a wise move on a number of fronts to end that policy.

Reform May End Up As A Net Positive
For all of the worries about what healthcare reform would mean to the insurance industry (and the truth is, healthcare reform was all about insurance reform), WellPoint may ultimately come out just fine. Floors on benefit expense, industry taxes and potential adverse selection effects are all real threats, but the creation of a mandate for all individuals to get insurance should swell the membership ranks. Moreover, for all the attention given to people who are uninsured because they cannot afford it, I suspect we will ultimately see that there is also a large number of people who forego coverage because they are in good health. If that proves true, WellPoint could benefit from a rise in premium-paying members who do not consume much in the way of benefits. (For more, see Investing In Health Insurance Companies.)

A Fine Stock, If Not Bulletproof
It is difficult not to like a stock like WellPoint when the company behind it generates so much free cash flow. I do not see very many avenues for WellPoint to accelerate top line growth, but so long as the company continues to execute well, it should be able to leverage ongoing population and employment growth (when the economy goes back to adding jobs) into free cash flow growth. That, combined with a very undemanding valuation, makes WLP shares worth a look for value-oriented investors. (For more, see Buying Private Health Insurance.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. India Remains An Emerging Market Bright Spot
    Stock Analysis

    India Remains An Emerging Market Bright Spot

  2. Still More Gains Ahead For Semiconductor Makers
    Stock Analysis

    Still More Gains Ahead For Semiconductor Makers

  3. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

  4. Finding An Alternative With Currency ETFs
    Stock Analysis

    Finding An Alternative With Currency ETFs

  5. 3 Great Value Stocks For A Secure Retirement
    Stock Analysis

    3 Great Value Stocks For A Secure Retirement

Trading Center