Cigna's Quarter Sings

Wall Street is ecstatic about the future at Cigna, though less so on smaller rival Health Net.
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is looking rather fit.

Powered by a turnaround in its health care business, the giant insurance company on Wednesday managed to blow past the consensus estimate of $1.61, with fourth-quarter operating profits of $2.41 a share. Including a special one-time gain, quarterly profits of $558 million -- or $4.16 a share -- nearly doubled from a year ago.

Cigna also raised its 2005 guidance by a nickel to between $5.55 and $6.05 a share. Even though the forecast fell well shy of the current consensus estimate of $6.18 a share, Cigna's stock jumped 4.3% to $87.50 on the latest update.

Goldman Sachs analyst Matthew Borsch portrayed the company's guidance as conservative. He pointed out that Cigna has calculated 2005 health care earnings at just $140 million a quarter -- far below the $230 million it generated in the most recent period. He said the new guidance also includes the early adoption of stock option-expensing standards and excludes future share repurchases.

Prudential analyst David Shove believes that Cigna is actually "on track for $7-plus in earnings" this year. In the meantime, he applauded recent progress in the company's health care business. During an extended transition period, the health care division has intentionally sacrificed growth in an effort to expand its profit margins instead.

"We expect that the company will continue to expand margins until historical norms are surpassed," wrote Shove, who has an overweight rating on the stock.

For now, however, Cigna continues to shrink. Fourth-quarter revenue slipped $200 million from a year ago to $4.3 billion but still topped expectations. And the company's membership declined more than some had expected.

Borsch, for one, highlighted the ongoing drop in customers and expressed worry that the trend would continue this year.

"Continued strength in 2005 will depend on Cigna's ability to stem the attrition of customers, which remains unclear," wrote Borsch, who has an underperform rating on the stock.

Borsch believes that Cigna is losing some of those customers to fellow insurance giant



, which will report its own quarterly results on Thursday. Unlike Cigna, Borsch believes, Aetna is likely to report a growing commercial membership base and a robust renewal season. Moreover, he expects "significant earnings upside" from recent share repurchases. He will be looking for fourth-quarter profits of $7.07 a share -- 6 cents ahead of the consensus estimate -- and 2005 profits of $8.70 a share that surpass current management guidance by a full 30 cents.

Borsch remains far less optimistic about smaller

Health Net


. After reviewing the company's earnings release from Tuesday, he listed a series of concerns. He called a big-fourth quarter charge, which pushed the company to a loss, unexpectedly large. He also believes that Health Net's 2005 profit guidance looks "more like a 'stretch' target than a conservative rebasing for a turnaround year." He believes that the company's enrollment will continue to decline more rapidly than management expects.

To be fair, Borsch acknowledges that Health Net's worst days may be over. Still, he sees significant risks ahead.

"Whereas 2004 was a 'problem recognition' year, 2005 will be a TOUGH turnaround year with buyers likely to stay away from Health Net until 2006," wrote Borsch, who considers Health Net the least favorite of his neutral-rated managed care stocks.

Nevertheless, Health Net continued a rally started Tuesday by jumping another 3% to $29.45 on Wednesday morning.

For his part, Shove conceded that Health Net's latest initiatives "may slowly create a solid foundation for future earnings growth." But he, too, remains bearish on the stock.

He also offered some detail about the big charge that helped push Health Net's quarterly results into the red. He said the company had spent years disputing claims in California that included unexpectedly high stop-loss, or outlier, charges. He said that Health Net is now paying $135 million to end that argument.

"Health Net had decided to settle these outstanding claims in exchange for new pricing contracts," he explained.

Shove failed to identify the recipient of that payment. However,


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-- a major player in the California hospital market -- has been accused of engaging in aggressive pricing practices that triggered unusually large outlier payments. Tenet has also repeatedly mentioned ongoing disputes with managed care payers.

Still, the arguments could be ongoing. Shove says that Health Net settled only one-third of its disputed claims and, as a result, could face additional charges this year.

Regardless, he sees more tough times ahead.

"In spite of its past corrective actions, Health Net continues to move slowly in its turnaround because of its underwriting challenges and enrollment losses," Shove wrote. "Until it changes these trends, Health Net's turnaround will likely be a long, laborious process."