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WellPoint Looking Sharp

The big health insurer boosts guidance, wowing fans.



keeps on bulking up.

The managed care giant on Wednesday posted another big jump in membership that, together with effective cost controls, allowed it to muscle past Wall Street expectations for the latest quarter. With help from big acquisitions -- which have essentially doubled the company's size over the past year -- WellPoint more than tripled its fourth-quarter profit to $652 million, or $1.04 a share. To be fair, the company benefited from the absence of year-ago charges but, excluding a small unusual expense this time around, still topped the consensus estimate by a penny.

"Looking back, 2005 was truly an exceptional year for our company," said WellPoint CEO Larry Glasscock. And "going forward, we have high expectations for 2006."

Indeed, WellPoint has already raised its guidance for the current year. The company now expects to earn $4.54 a share instead of the $4.51 it previously promised. Wall Street was projecting 2006 profits of $4.58 a share even before that update.

Prudential analyst David Shove felt bullish after reading the company's latest report. Shove has an overweight rating on WellPoint's stock, and his firm owns at least 1% of the company's shares.

"WellPoint's fourth-quarter earnings were solid across all metrics," Shove wrote on Wednesday morning. And "we believe that 2006 will be characterized by upside from slowing claim trend and Medicare initiatives."

Meanwhile, Goldman Sachs analyst Matthew Borsch portrayed WellPoint's latest quarter as a solid one "with no significant issues." Borsch has an in-line rating on the company's stock and a cautious outlook on the managed care group as a whole. His firm does, and seeks to do, business with the companies it follows.

WellPoint reported strong growth across all of its business lines. For the fourth quarter, the company posted revenue of $11.3 billion -- up 68% from a year ago -- that came very close to the $11.39 billion consensus estimate. It boasted an 18% jump in enrollment that left it with 33.9 million customers at the end of 2005. It saw its medical cost ratio drop, once again, and now expects that ratio to hover around 81.5% for the remainder of this year. And it reiterated its pledge to grow its membership base by at least 3% in 2006.

Investors applauded the company's strength, pushing shares of WellPoint up 1.5% to $74.25 early Wednesday.

Early Calls

Many experts recommended buying WellPoint shares ahead of the company's year-end report.

Stifel Nicolaus analyst Thomas Carroll predicted that WellPoint would top Wall Street expectations for both the fourth quarter and 2005 as a whole. Carroll suggested the potential for 2006 upside as well. He expressed particular excitement about Medicare Part D, saying that the company could bring in far more members -- and revenue -- than it currently expects.

"A core assumption of our projections is that WellPoint, as a Blue Cross Blue Shield organization, possesses differentiating brand recognition within the senior population that will result in above-average market share gains," writes Carroll, who has a buy recommendation on the company's stock. And "this assumption is confirmed by recent Part D beneficiary surveys."

For its part, WellPoint believes that Part D will add about $1 billion to its revenue this year. However, Carroll is looking for the program to boost the company's revenue by $2.4 billion -- and even generate some profits -- during its first year of operation.

Stifel Nicolaus regularly seeks to do business with the companies it covers. Based on its disclosures, the firm's "shareholders, directors, officers and/or employees may from time to time have long or short positions" in certain stocks.

TheStreet Recommends

Others, including some major WellPoint fans, have offered more cautious views. Bear Stearns analyst John Rex predicted that WellPoint would actually fall a penny shy of fourth-quarter expectations, although he felt that past acquisitions could muddy the results. Ultimately, however, Rex was looking for a rise in customer enrollment and a drop in medical costs to keep boosting the bottom line.

Going forward, Rex expects WellPoint to deliver 2006 profits of $4.50 a share -- 8 cents shy of the current consensus estimate -- with share repurchases possibly adding to that number. In the meantime, he notes that WellPoint has already scaled back its own growth expectations for the year.

"The company stated at its December 2005 investor day that it anticipated that 2006 organic member adds would come in at about 3%, the low end of its 3% to 5% long-term goal," notes Rex, who has an outperform recommendation on the company's stock. "This is, in part, impacted by the loss of several state employee accounts."

Meanwhile, Rex remains cautious about the company's new Medicare-related business. Indeed, his own projections for Part D enrollment fall short of even the company's own.

"We expect that the company will post higher Part D membership than it did at its investor day," he concedes. But "our view is that, with


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seemingly taking the lion's share of the actively elected population, (we) would not expect the company to necessarily raise its Part D guidance" right now.

WellPoint currently is, or recently has been, a non-investment banking client of Bear Stearns.

A.G. Edwards analyst J. Paul Newsome likes WellPoint in spite of its Medicare business. He initiated coverage of WellPoint's stock this month with a buy recommendation because he believes the company can deliver double-digit profit growth for the next several years.

Already, Newsome is looking for WellPoint to beat the current consensus estimate -- and the company's own guidance -- for this year. He believes that WellPoint will raise prices, cut costs and grow important segments of its business going forward.

He excludes Medicare from his formula for success, however. Indeed, he feels somewhat nervous about government-sponsored programs in general.

"The propensity of a federal legislator to change policy every two to four years, potentially destroying large programs with heavy investment that cannot be easily recovered, is too risky for the limited marginal reward that government programs typically offer," Newsome explains. "We recognize the potential that such large-volume business offers, but we also see the risk of thin-margin businesses that can be unfavorably altered on the whim of political ideology."

That said, Newsome still believes that WellPoint will fare better than some in the new Medicare program.

"In general, we are not optimistic that Medicare Part D products will deliver a substantial benefit for health insurers," he writes. But "WellPoint is ... one of the companies we believe will be successful."