Tuesday, October 03, 2006

Calls of Note Part 1

- Goldman Sachs has added Aetna (NYSE:AET) to the Americas Conviction Buy List, reflecting their expectation for near-term stock upside on 3Q2006 earnings. Firm sees ~18% upside to their 6-month price target of $46 (up from $44), based on 14.2X 2007 EPS. They believe sentiment will continue to improve as Aetna demonstrates stabilization in its commercial underwriting and benefits from the conservative reserving approach it took with its 2Q2006 results. Likewise, their annual employer survey results find Aetna continuing to show strong momentum in its ranking among national account employers relative to other carriers, which the firm believes will translate to strong January 2007 fee-based (ASO, non-risk) national account gains.

While Aetna will continue to face competitive pressure on its core commercial business, the firm thinks 3Q2006 results will help to show that the price and cost trend pressures are more reflective of industry competitive pressures as opposed to "company specific" problems. They therefore believe the market over-reacted to the 2Q2006 trend issues at Aetna specifically, while "under-reacting" to the potential risks ahead for the higher valuation names in the commercial group.

Aetna trades at 12.5X 2007 EPS of $2.85, a more than 10% discount to the commercial managed care average forward P/E, as investor concerns linger on the question of whether the company is an "aggressive pricing outlier" relative other companies, as some have argued.

Notablecalls: Not going to call this one actionable. AET's far too big to be moved by a call like this one. Also, the stock is starting to look weak.

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