Holders Are Glad They Met Aetna

The stock surges as the big health insurer posts strong revenue gains and reduced costs.
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turn to flex its muscles.

The giant health insurer has delivered a knockout quarter and promised even stronger results for the current year. Despite a rise in medical costs, the company managed to beat fourth-quarter expectations by growing its membership base, its fees -- and, in turn, its revenues -- and capitalizing on cost efficiencies. It also raised the bar dramatically for 2005.

"The raised guidance and indications of strong 2005 enrollment show a company firing on all cylinders in our view," wrote Prudential analyst David Shove, who has an overweight rating on the stock.

Shares of Aetna bounced 4.2% to $133.92 after the company's report. Aetna will execute a 2-for-1 stock split on Feb. 25.

In the meantime, it posted fourth-quarter operating profits of $1.80 a share that came in 38% higher than a year ago and beat the consensus estimate by 2 cents. It also issued new 2005 guidance of $8.75 to $8.90 a share, representing an annual growth rate of 20% to 22%, that's well above the current Wall Street forecast of $8.51 a share.

Aetna's fourth-quarter revenue of $5.13 billion, up 13% from a year ago, fell just shy of expectations. But weak spots were scarce. Net income jumped 21% to $301 million for the quarter and, including special tax gains, more than doubled to $2.2 billion for the year.

During the fourth quarter, the company posted a 14% hike in premiums and a 9.9% rise in fees. Total operating costs rose along with selling expenses. However, general and administrative expenses declined. And operating margins improved on both a pretax and after-tax basis.

The company also boasted sequential growth in all three of its major business lines. In addition, it reported a "very strong" January selling season.

"We believe that our enhanced customer offerings have truly differentiated Aetna," President Ronald Williams said. "In fact, the continued increase in our enrollment is important market validation of the strength of Aetna's product and service offerings."

Different Tune

In contrast,



found itself singing the Blues. The for-profit Blue Cross player reported fourth-quarter operating profits of 71 cents a share that fell 3 cents shy of expectations. Analysts said a jump in medical costs, triggered by a rise in doctor visits among Medicare patients, led to the shortfall.

January brought another tough blow. The company lost a big account that left it with less than half the new national account members it had expected for the month. Even so, it reiterated its guidance for 2005.

Still, new challenges loom. WellChoice disclosed on Thursday that it faces a dispute in New York that, while unlikely, could threaten its Blue Cross license. New York Comptroller Alan Hevesi is contesting a previous legal opinion by asserting that a state fund, which owns the majority of WellChoice's stock, cannot execute stock sales valued at more than $15,000 without his approval. As part of its conversion to for-profit status, WellPoint must reduce the fund's ownership to a minority stake.

"The company and the fund disagree with the comptroller's assertion regarding these issues," WellChoice stated. "However, if the comptroller's position ... is correct, all contracts previously entered into by the fund could be deemed invalid and unenforceable, and the fund may not be able to enter into additional contracts unless and until the comptroller's approval is obtained."

Shares of WellChoice slid 1.7% to $51.38 on the latest news.

Shove, for one, expressed concern. Granted, he spotted weakness in the company's operational results. Although WellChoice posted solid enrollment growth, he noted, it failed to overcome a spike in medical costs that led it to miss expectations. He also worries that the company is facing tougher competition from industry leaders -- like Aetna,


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-- that reported better quarters.

However, Shove dwelled on the New York dispute even more.

"Facing new uncertainties, we think WellChoice's legal risk has risen significantly and could affect valuation levels," wrote Shove, who has a neutral rating on the stock. And "since New York state political fights tend to be resolved at the 11th hour, we probably will have no visibility on WellChoice's legal risk for a long while."

In contrast, Goldman Sachs analyst Matthew Borsch sounded rather calm. He said the New York parties would also hurt themselves by causing WellChoice any serious harm. Thus, he believes the dispute will be resolved over the next few months without any serious pain to the company.

Borsch did call the company's latest operating results weak. Nevertheless, he said, the company remains his favorite mid-cap stock in the sector.

"WellChoice fundamentals remain on track," he wrote, "and we would see a buying opportunity on an overly negative market reaction."