Aetna's Shares Rise on Earnings Beat - TheStreet




investors feel a little better after reviewing the company's latest results.

The giant health insurer beat profit expectations for the second quarter on Thursday, as the company enrolled more customers and charged them more money for its services. Although Aetna's net income rose just 6.5% to $480.5 million, due in part to smaller releases from pension-related reserves, the company's earnings per share grew at twice that rate - hitting 94 cents a share in the second period - and topped the consensus estimate by a penny in the end.

For the most part, Aetna posted solid metrics overall. Revenue climbed a healthy 15% to $7.83 billion, almost hitting Wall Street's lofty $7.87 billion target. Meanwhile, operating expenses as a percentage of revenue came in lower than they did a year ago.

Notably, Aetna's all-important "medical cost ratio" -- or the percent of revenue spent on actual care -- barely rose. The company's Medicare MCR actually fell from 88.2% to 86.9%, while its closely watched commercial MCR held steady at 80.5%. Including its new Medicaid business, where costs tend to run higher, the company's overall MCR came out at 81.9% for the quarter.

"Aetna's performance in the second quarter demonstrates our ability to continue producing solid results driven by strong revenue growth, as well as membership gains, even in a challenging economic and industry environment," the company said on Thursday. "Our focus remains on delivering profitable growth, and we are well positioned to deliver on our projections."

Going forward, Aetna expects to grow its profits even faster than it has so far. The company reiterated its promise on Thursday to increase its EPS by 15% to $4 for the full year.

Even though analysts had hoped for a little more, with the consensus estimate for the year currently resting at $4.01 a share, investors cheered the news. They pushed the company's stock up 4.9% to $42.30 on Thursday morning. They sparked a rally in the shares of several other health insurers - including


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- as well.

Goldman Sachs analyst Matthew Borsch expected Aetna's bounce. However, he seemed worried about whether it would prove justified in the end.

"The quarter seems tight from our perspective, in light of the healthcare earnings and the commercial MCR exactly at the 80.5% guidance," Borsch observed on Thursday. Meanwhile, "our view on Aetna remains unchanged: We don't believe the company can remain immune from the margin pressure that has impacted other carriers in the price-sensitive commercial risk business.

"However," he concluded, "we are frankly unsure of the timing for earnings downside."

Although Borsch expects Aetna to hit its targets for the current year, he fears that the company will run into trouble on down the road. He has established a Street-low earnings target of $3.50 a share for 2009 as a result.

Borsch has placed Aetna on Goldman's "Americas Sell List" in the meantime. His firm has investment banking ties to the company.