WellPoint Fans Focusing on Blemishes

Shares fall 3% despite a strong third quarter.
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WellPoint

(WLP)

looks healthy.

The big health insurer beat profit expectations for the third quarter due to strength in its commercial and government businesses alike.

Net income jumped 27% to $811 million in the period, with an operating profit of $1.24 a share topping the consensus estimate by a penny.

Looking ahead, WellPoint has raised its guidance for the full year as well.

Excluding special items, the company now expects to report earnings of $4.78 a share in 2006, 2 cents better than analysts had anticipated.

"We are very pleased with our continued strong performance in 2006, and our third-quarter results reinforce our earnings growth expectations for the remainder of the year," said WellPoint CEO Larry Glasscock. In addition, "while we will release our specific 2007 outlook in December, we expect continued earnings-per-share growth and further improvement in operating margins through more efficient operations."

Some weak spots did surface in the latest quarter, however.

For starters, revenue, while up 29% to $14.2 billion, did fall short of Wall Street targets.

Medical expenses ticked up as well, due in part to higher costs associated with two big government contracts. Meanwhile, large group accounts continued to decline.

Concerns about those issues may have been evident in Wednesday's trading, which saw WellPoint slip $2.83 to $75.85.

Still, the company's national accounts division -- which offers increasingly popular consumer-driven health plans -- added 765,000 customers in the latest quarter.

The company's Medicaid unit added another 134,000 members.

And the company's offerings for individuals, small groups and senior citizens attracted more people as well.

Several analysts expected WellPoint to meet -- and perhaps beat -- consensus estimates. They assumed that the company would report strong operational results, with possible upside coming from extra share repurchases.

"Last quarter, the actual

share repurchases exceeded our outlook meaningfully, benefiting from a $1 billion increase in authorization that was not disclosed until the

second-quarter report," notes Bear Stearns analyst John Rex. "We believe that the company has the capacity -- and the appetite -- to expand activity again."

WellPoint bought nearly $400 million worth of stock in the third quarter, as expected, and recently secured authorization to purchase even more in the current period.

Rex assumed that WellPoint would deliver solid results.

Although he expected some expenses to climb, with spending on consumer-driven health plans on the rise, he figured that the company would continue to benefit from moderating medical cost trends.

As for enrollment -- a key area of focus for the sector -- Rex predicted ongoing losses in large group accounts but felt that they should be more than offset by gains in other commercial lines and big advances in the company's Medicaid business.

Rex has an outperform rating and a $93 price target on WellPoint's stock. His firm seeks to do business with the companies it covers.

JP Morgan analyst William Georges looked for major growth in WellPoint's government business as well.

Indeed, Georges predicted that more than half of the company's risk-based membership gains would come from Medicaid customers alone.

He specifically noted opportunities in several states outside those that have posed challenges for rival

UnitedHealth

(UNH) - Get Report

.

"We believe WellPoint's Medicaid business represents a positive growth catalyst for the company heading into 2007," writes Georges, whose firm has an investment banking relationship with the company. "Given WellPoint's strong membership growth prospects, leading market share positions, proven track record of execution and diversified product portfolio, we expect the shares should trade to a 10% to 20% premium to the commercial managed care group. We reiterate our overweight rating" on the company's stock.

Williams Capital Group analyst Beth Senko is somewhat more cautious.

She has a hold recommendation on WellPoint's stock, but still likes the company better than any of its competitors.

"Given the erratic performance of the group following EPS announcements for the past four quarters, it seems reasonable to conclude that investors are still somewhat conflicted on the group," Senko explained on Tuesday. That said, "WLP remains our favorite name in the managed care group."

Senko has a $73.50 target price on WellPoint's stock. Her firm has no business relationship with the company.