WellPoint ( WLP) looks stronger than ever. The nation's largest health insurer on Wednesday easily muscled past Wall Street expectations for the second quarter and lifted its guidance for the full year. By gobbling up its stock and keeping its medical costs under control, the company continues to thrive in a tough enrollment environment. During the latest period, WellPoint grew revenue by 27% to $13.9 billion with help from an acquisition. While the company fell short of the $14.1 billion consensus estimate, it managed to beat some other important targets. Notably, the company posted second-quarter profits of $1.17 a share that topped the consensus estimate by 3 cents. Net income surged 34% to $751 million. UBS analyst Justin Lake says that three major factors -- share repurchases, operating cost controls and strong specialty results -- pushed profits ahead of his estimates. WellPoint spent $1.7 billion buying back 23.3 million shares of its stock in the latest quarter. Some believe that the company will now increase its share repurchase budget going forward. In the meantime, Lake has a buy recommendation and a $90 price target on WellPoint's stock. His firm has provided investment banking services to the company in the past. To be sure, WellPoint itself feels optimistic about the future. Notably, the company now expects to earn $1.22 a share in the third quarter and $4.74 a share over the course of the full year. Before that update, Wall Street had been projecting profits of $1.19 and $4.65 for those periods, respectively. "We are very pleased with our strong second-quarter results that reinforce the very high expectations we set for ourselves at the beginning of the year," WellPoint CEO Larry Glasscock stated. "From a financial perspective, earnings-per-share growth was very strong, administrative costs as a percentage of revenue continued to improve and our medical-expense ratio declined compared to the first quarter ... During the second half of 2006, we expect continued membership growth but not at the expense of profitability."
WellPoint now expects to end the year with 34.5 million members, Lake notes, down 300,000 from earlier forecasts. In addition, he says, the company has lowered its full-year revenue projection by $200 million to $56.4 billion. Investors clearly dwelled on those metrics, pushing the company's stock down 2.5% to $76.02 early Wednesday morning.
Stifel Nicolaus analyst Thomas Carroll predicted that WellPoint would match the consensus profit estimate for the quarter and, looking ahead, set itself up to inch past management guidance for the entire year. Importantly, he also portrayed WellPoint as a safer investment than its biggest competitor. "WellPoint, in our opinion, has solidified itself as the large-cap alternative to UnitedHealth ( UNH) in the managed care space," Carroll wrote on Monday. "Our interactions with management subsequent to 1Q06 reveal confidence and stability in the organization without material overhangs such as the options controversy." Carroll highlighted a number of favorable trends that could drive the company's stock higher. Specifically, he noted moderating medical costs, positive underwriting spreads, declining overhead and potential membership upside from Medicare and -- increasingly -- Medicaid. Already, Carroll noted, WellPoint ranks as the largest Medicaid insurer in the country, with approximately 2 million members. Moreover, he said, the company "should definitely add 250,000" new Medicaid customers over the course of the next year. He pointed to recent Medicaid gains in Nevada, Ohio and Texas, plus opportunities in Kansas, Indiana and Tennessee, as reasons for his confidence. "WellPoint enrollment growth may lead the sector due to Medicaid awards this year," Carroll stated. "This will support organic enrollment growth through 2007 and potentially be a source for an increase in enrollment guidance." Interestingly, Carroll looks for less impact from the new high-profile Medicare Part D program this year. Although WellPoint ranks as the third-largest Part D provider, he says, the company has deliberately taken a conservative stance on this growth vehicle due to the perceived risks -- particularly with reimbursement -- that could be involved. Meanwhile, Carroll expressed comfort with WellPoint's strategy in the important commercial market. He acknowledged that investors have grown increasingly nervous about losses in risk-based commercial accounts, and even predicted that this trend would continue. However, he foresaw help coming from new risk-based accounts in the government and individual/small group markets.
In the end, Carroll recommended WellPoint as a solid stock that he values at between $100 and $105 a share. Carroll's firm hopes to secure investment banking business from the company over the next three months.