The following ratings changes were generated on Tuesday, Oct. 7.
We downgraded Aetna (AET - Get Report), one of the nation's largest providers of health care and related benefits, to hold from buy. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share and increase in net income. However, countering those strengths are poor profit margins, weak operating cash flow and a generally disappointing performance in the stock itself.
Revenues rose by 15.2% since the same quarter one year prior, which appears to have helped boost EPS, which rose 14.1% in the most recent quarter over the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue, and it suggest improving business performance.
During the past fiscal year, Aetna increased its bottom line by earning $3.48, vs. $2.97 in the prior year. This year, the market expects earnings to improve again, to $4. The current debt-to-equity ratio, 0.39, is below the industry average, implying successful management of debt levels.Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.34 is very weak and demonstrates a lack of ability to pay short-term obligations. Net operating cash flow has decreased to $186.50 million, or by 41.77% when compared with the same quarter last year. Despite a decrease in cash flow, Aetna is still fairing well by exceeding its industry average cash flow growth rate of -56.22%. The gross profit margin for Aetna is currently lower than desirable, coming in at 27.80%. It has decreased from the same quarter the previous year. Regardless of the weak results of the gross profit margin, the net profit margin of 6.10% is above that of the industry average.