WellPoint Looking Fit

But HCA continues to be hit by uninsured patient costs. Plus, gains at Exactech.
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WellPoint

(WLP)

is showing off its strength.

Fueled by broad membership growth, the nation's largest health insurance company on Wednesday barreled past profit estimates for the second quarter and raised the bar for the full year as well. Revenue jumped 8% to $11.1 million, just shy of the consensus estimate, while net income more than doubled to $559 million following the company's big merger with Anthem. Excluding special items, the company's third-quarter profit of $1 a share topped Wall Street expectations by 3 cents.

WellPoint boasted on Wednesday that it had managed to deliver on all of its targets.

"Our efforts are reflected in the membership growth we continue to see and the gains we have realized in all of our business segments," said WellPoint CEO Larry Glasscock. "We expect to realize growth across our operations as we continue to enhance our capabilities, expand our product offerings and excel in meeting our customers' needs and expectations."

Following a strong first half, WellPoint has now raised its full-year guidance by 4 cents to $3.97 a share. That's a penny better than analysts were previously forecasting.

Nevertheless, shares of WellPoint slipped 29 cents to $68 Wednesday.

Healthy Results

On a comparable basis, WellPoint saw its medical enrollment rise by 6% to 28.8 million members in the latest quarter. The company enjoyed gains across all of its business lines, particularly its national accounts and large group segments. The company's individual and small groups operation posted solid gains as well.

At the same time, WellPoint managed to hold its medical loss ratio steady and continues to forecast a manageable ratio of less than 9% for the full year. The company's second-quarter ratio came in better than some, like Goldman Sachs analyst Matthew Borsch, had expected.

WellPoint also topped Borsch's profit forecast, due in part to income from investments, and essentially matched his cash flow projection of 1.2 times net income -- or $654 million -- for the quarter. Going forward, Borsch is expecting even better from the company.

Notably, he believes that WellPoint will enjoy increased momentum among national employers for at least three reasons. First, he points to the strength that WellPoint now enjoys following its merger with Anthem. Second, he highlights the company's enhanced consumer-directed offerings that resulted from yet another acquisition. And finally, he notes the company's expanding interest in a BlueCard system that connects all of the Blue Cross plans together into the largest -- and most heavily discounted -- national provider network in the country.

Borsch has an outperform rating on the stock.

Prudential analyst David Shove sees plenty to like about WellPoint as well. For starters, he says, the company's latest results beat his expectations on every metric. He points to several factors -- including the company's steady medical loss ratio, its reduction in overhead costs and its financial management -- as reasons for that success. Looking ahead, he expects the company to continue to fare well, likely dominating the new Medicare space, and therefore maintains his outperform rating on the stock.

Hospital Ailments

Shove is decidedly less enthusiastic about hospital chain

HCA

(HCA) - Get Report

, another health care giant that reported earnings on Wednesday.

After preannouncing disappointing results earlier this month, HCA has now offered a few details about its earnings miss. Overall, the company posted second-quarter revenue of $6 billion -- up 4.3% from a year ago -- that fell $100 million shy of Wall Street expectations. Special items, including a favorable tax settlement and a gain on an asset sale, did push net income 15% higher to $405 million in the quarter. Excluding special items, however, the company's second-quarter profit of 74 cents a share missed the current consensus estimate by 2 cents.

Peter Young, a business consultant for HealthCare Strategic Issues, offered a simple explanation for the company's weak results.

"Patient volumes softened," he said, "but uninsured

admissions continued to rise."

Indeed, same-facility admissions actually dropped slightly in the latest quarter. At the same time, however, uninsured admissions rocketed by 5.1%.

That unfavorable patient mix clearly cut into results. Without new discounts provided to the uninsured, HCA disclosed, net revenue would have grown by 7.5% instead of 4.3%. But much of that revenue would have turned into bad debt expense down the road. By offering upfront discounts instead, the company was able to post bad-debt expense of 8.9% -- down from 11.3% a year ago -- instead of 11.6% of revenue.

Like Young, however, Shove saw clear reason to fret about the company's latest report.

"The shortfall in earnings was due to dismal admissions ... and a sharp rise in uninsured admission," noted Shove, who has a neutral rating on the stock. "HCA's 2Q05 performance reinforces our view of industry volume and pricing pressures."

HCA's stock, which already took a big hit on this month's profit warning, slipped another 11 cents to $49.48 on Wednesday.

Stronger Sector

Exactech

(EXAC)

, a small-cap maker of medical devices, fared considerably better.

While high prices for medical devices -- particularly orthopedic implants -- have been pressuring hospital results, the companies that make those products continue to perform quite well. For example, Exactech on Wednesday posted second-quarter revenue of $23.9 million -- up 17% from a year ago -- that came in $1.6 million ahead of Wall Street expectations. Earnings of $1.9 million, or 16 cents a share, were flat with a year ago but nevertheless topped the consensus estimate by 3 cents.

More specifically, the company saw sales of artificial hips and knees jump by 9% and 11% respectively in the latest period. Total sales grew by 12% in the crucial U.S. market and at three times that clip internationally. Gross margins inched up though they still fell short of the incredible rates posted by larger players like

Biomet

(BMET)

and

Zimmer Holdings

(ZMH)

.

Still, Exactech saw reason enough to tout.

"Gross margin during the quarter improved from 66.3% last year to 67.4%," noted CFO Jody Phillips. "This was an excellent result considering the strong growth of our international sales, which carry a lower margin."

Higher operating expenses -- including a 23% hike for research and development -- cut into results. Still, the company portrayed its higher-than-average R&D costs as a necessary investment in the future.

"We expect both the growth rate and percentage of sales for R&D (which came in at 6.5% in the latest quarter) to increase through the balance of the year as we reach key milestones in support of new product development initiatives," the company explained. "Although these expenses are impacting the growth of our short-term earnings, we believe these near-term strategic investments will yield stronger earnings growth for Exactech's future."

Looking ahead to the third quarter, Exactech expects to beat Wall Street's profit estimate of 13 cents with earnings of 14 cents to 16 cents a share. The company also offered new full-year guidance for revenue of $90 million to $94 million and earnings between 56 cents and 60 cents a share. On average, analysts were looking for revenue of $90.5 million and earnings of 53 cents.

Shares of Exactech rocketed 4.4% to $15.13 on the favorable update.