Mixed Quarter Hits WellPoint

Shares fall after analysts see enrollment setbacks.
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WellPoint's

(WLP)

vital signs look mixed.

While enrollment came in weak during the second quarter, other key metrics -- including crucial medical cost trends -- showed improvement, as the company met financial targets for the latest period. Net income rose 15% to $835 million, with earnings per share of $1.35 matching the consensus estimate exactly. Revenue, up 7.5% to $15 billion, was in line with analyst forecasts as well.

But enrollment setbacks hurt that otherwise healthy picture, as fierce competition and economic woes took their toll.

"Membership of 34.8 million (up 1.8% year-over-year versus our 2.5% estimate) remains challenged for WellPoint and the industry," JPMorgan analyst William Georges wrote on Wednesday. Moreover, "membership declined sequentially 108,000 members (JPM est. +139,000), as employee reductions in auto, home building and mortgage sectors hampered membership growth -- the first signal we have seen of broader market concerns impacting managed care organizations."

Nevertheless, Georges has an overweight rating on WellPoint's stock. His firm has investment-banking ties to the company.

Meanwhile, WellPoint took an immediate hit after its latest update. The company's stock -- which set a 52-week high of $86.25 this spring -- fell 3% to $79.75 on Wednesday.

The news comes as investors in the health care cost containment business look for clues from WellPoint and rivals such as

UnitedHealth

(UNH) - Get Report

,

Humana

(HUM) - Get Report

and

Aetna

(AET)

.

Until now, most investors have focused far more on medical cost trends than they have on enrollment numbers. On that matter, at least, they have some reason to feel reassured.

Notably, WellPoint posted a medical loss ratio of 81.8% that -- while up from a year ago -- showed clear improvement from the first quarter. Moreover, that improvement came from the company's crucial commercial business with a little help from its high-cost Medicaid business to boot. Looming rate increases should further boost Medicaid results as the year wears on.

Meanwhile, WellPoint's lower MLR -- coupled with a lower tax rate -- helped offset higher discretionary spending and allowed the company hit its bottom-line goals. Still, the company's newly raised full-year guidance remains a penny shy of current Wall Street estimates.

Of course, WellPoint itself sounded decidedly upbeat.

"We continue to demonstrate our ability to consistently deliver strong earnings growth while also providing members with new benefit options and services that improve the affordability and quality of the health care they receive," WellPoint CEO Angela Braly stated on Wednesday. "As a result of our efforts during the first half of the year, we are raising our full-year earnings guidance to $5.55 per share and continue to target long-term annual earnings-per-share growth of 15%.

"At the same time, we continue to expand our efforts to find new solutions for those who do not have health insurance in addition to undertaking strategic initiatives to reduce growth in health care expenditures, increase transparency and promote quality."

For the most part, Wall Street experts feel bullish about WellPoint's prospects. Indeed, Bear Stearns analyst John Rex portrayed the company's stock as a real bargain ahead of Wednesday's update. His firm seeks to do business with the companies it covers.

"Shares of WLP currently trade at the lowest multiple in the group (a 5% discount to the average), having been stalled now for some time," Rex wrote last week. "We anticipate that a much-improved MLR with the 2Q report will help near-term, while seemingly already widely expected. ... Our price target is $93 a share."