Coventry Beats Est, Lags Y/Y - Analyst Blog

By Zacks | October 26, 2012 AAA

Coventry Health Care Inc. (CVH) reported third-quarter 2012 operating earnings per share of 78 cents, which surpassed the Zacks Consensus Estimate of 72 cents, but was lower than the prior-year earnings of 83 cents. Coventry reported net income of $105.3 million compared with $122.7 million in the prior-year quarter. Operating revenues in the reported quarter jumped 16% year over year to $3.5 billion, at par with the Zacks Consensus Estimate. Managed care premiums increased 18% year over year to $3.17 billion, while revenues from management services declined 2% to $289 million.

Coventry's total operating expense expanded 18.5% year over year to $3.30 billion. Additionally, medical costs, the major operating expense component, increased to $2.67 billion from $2.19 billion in the prior-year quarter.

Likewise, Coventry's selling, general and administrative (SG&A) expenses increased to $521.0 million from $492.9 million recorded a year ago, while depreciation and amortization (D&A) expenses increased to $36.3 million from $33.0 million in the year-ago quarter. However, cost of sales declined to $66.2 million from $71.5 million in the third quarter of 2011.

Total membership witnessed a growth of 93,000 from the second quarter of 2012 to 5,374,000 in the reported quarter.

Commercial Risk: The Commercial Risk membership for the reported quarter was 1,489,000, down 30,000 members from the prior quarter. Commercial Risk Medical Loss Ratio (MLR) in the reported quarter came in at 81.5%.

Medicare Advantage Coordinated Care Plans (MA-CCP): Coventry reported MA-CCP membership of 256,000, showing an increase of 3,000 members from the second quarter of 2012. The MA-CCP MLR came in at 83.1%.

Medicare Part D: Medicare Part D membership stood at 1,545,000 at the end of the reported quarter, up by 51,000 members from the prior quarter. The Medicare Part D MLR in the quarter came in at 84.2%.

Medicaid: The Medicaid membership at the end of the reported quarter stood at 998,000, which reflected an increase of 66,000 members over the second quarter of 2012. The Medicaid MLR in the quarter came in at 93.0%.

Balance Sheet and Capital Structure

Coventry ended the reported quarter with approximately $1.26 billion in cash and cash equivalents, down from $1.58 billion at the end of 2011. Deployable cash at the parent company stood at $850 million at the end of September 2012. Operating cash outflow totaled $260.3 million at the end of the reported quarter.

As of September 30, 2012, Coventry had total assets of $8.71 billion and shareholders' equity of $4.63 billion. The company exited the quarter with $1.59 billion in long-term debt, almost at par with 2011 end.

Outlook for 2012

Coventry raised its 2012 earnings per share guidance to $3.25-$3.30 from $3.10-$3.30. The new guidance includes 6 cents per share associated with SG&A expenses related to the acquisition by Aetna Inc. (AET). Projection for risk revenue was reduced to $12.88-$12.98 billion from $12.900-$13.065 billion, while the guidance for the management services revenue was revised to $1.18-$1.19 billion from $1.165-$1.200 billion.

The company also modified its consolidated revenue guidance range to $14.06-$14.17 billion from $14.065-$14.265 billion. Coventry's consolidated MLR will likely be in the 83.9%-84.3% band against the previous guidance of 84.0%-84.7%.

Coventry anticipates the cost of sales expense to lie in the range of $264-$268 million, up from the earlier projection of $257-$263 million. The company also projects SG&A expenses to be in the range of $2.09-$2.11 billion, D&A between $152 million and $153 million and interest expense in the range of $99.0-$100.0 million in fiscal 2012.

Coventry's other income is projected between $105 million and $115 million, while tax rate is estimated to be in the 37.7%-38.3% range. Shares outstanding at year end are expected to be in the range of 136.5-137.5 million.

Peer Take

Coventry's competitor, WellPoint Inc. (WLP) will report its third-quarter 2012 financial results before the opening bell on November 7, 2012.

Another peer, UnitedHealth Group Inc. (UNH) reported its third quarter 2012 earnings of $1.50 per share, significantly ahead of the Zacks Consensus Estimate of $1.31 per share. Higher revenue across the board and strong enrollment growth, partially offset by higher operating costs, were responsible for the better-than-expected results. Also, share repurchases boosted the bottom-line earnings.

Coventry carries a Zacks #2 Rank, which translates into a short-term Buy rating.

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