Monday, July 27, 2009

Aetna (NYSE:AET) : Colour on quarter - Bounce?

I wanted to highlight you some comments on Aetna (NYSE:AET) following a surprisingly weak earnings report out this morning:

AET reported operating EPS of $0.68, 13% below the Street's $0.78 est. AET also lowered 2009 EPS guidance to $2.75-2.90 from $3.55- $3.70, a 22% reduction at mid-point.

- Deutsche Bank notes the EPS guidance reduction was primarily due to continued higher medical costs in Commercial segment. The Commercial MLR came in at 85.9% vs Deutsche's 83.4% est, and included $65 million of negative PPRD primarily related to 2008 medical claims; ex PPRD the Commercial MLR would have been 84.6%. For 2009, AET now expects a Commercial MLR of 84.0-84.5% up from prior 82.3-82.8% guidance. This implies a Commercial MLR of 83.5-84.5% for 2H09. Total revs came in at $8.657b, $82m above est. Total membership was 55k lives above 19.052m est, driven primarily by higher Commerical risk and Medicaid ASO, partially offset by lower Commerical ASO.

On a positive note, AET increased health care claims reserves sequentially by $83.1m; however, DCPs declined by 0.4 days from 41.6 to 41.2, likely reflecting the higher reported medical expenses in 2Q09. AET repurchased 10.9m shares for $271m in 2Q. AET reported net capital gains in the investment portfolio in 2Q09.

Separately, the WSJ has an article out today noting that AET has been shopping its PBM, which could provide some near-term support to the stock. While the bear case will highlight that AET's MLR pressures create continued EPS risk, the bull case will state that AET has now moved its guidance to a more conservative level and the firm sees a near-term catalyst forthe stock with the potential sale of the PBM. Maintain Buy rating.

- Citigroup is out saying they think current results could mark a bottom. Aetna's strong customer growth and positive channel checks leave them convinced they can stabilize margin with price increases and still gain share of the shrinking commercial market. Also, large reserve increases last year by competitors leave them with a cushion to absorb higher medical trend this year.

Where the stock closes today (they think $24-$25) will depend on how convincing management is in their earnings call at 8:30a.m. ET that the new EPS guidance can be met. Citi's read is the new guidance is conservative based on sequential 3% reserve growth vs. 0.5% premium growth. Also, the WSJ reported potential PBM sale this a.m., and they expect strong results from WLP Wednesday, provide support.

Notablecalls: I think AET has the ability to bounce. Where? I suspect the stock is a buy sub-$24 and sell around $25. Let's see how that goes.

I personally missed the low $23 buy point.


bl said...

Better off buying it's brothers:unh ci hum cvh wlp agp unh...then short the rally

bl said...

Say what about the home builder/regional banks rally on the New Home Sales, 7 est! whowskee!!

notablecalls said...

insightful stuff, man

bl said...

now...for me to take advantage of it...Thanks