Keep an Eye on This Forward-looking Company
Elise is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One news item this week really caught my attention: Wellpoint (NYSE: WLP) is going to be using IBM's (NYSE: IBM)Watson to improve medical care! Watson, you may recall, is the computer that trounced the affable, but all too-human, Jeopardy champion Ken Jennings. Because I'm interested in how modern computing power can profitably improve decision-making (i.e. real options or improved data mining techniques that reveal new insights), I wanted to learn more about this forward-thinking insurance company.
Wellpoint is one of the largest health insurers, covering over 10% of Americans and holding an exclusive license for the well-respected Blue Cross/Blue Shield names in 14 states including California and New York. It's market cap is $21.5B, leading to a forward P/E ratio of 7.6, well below the S&P500 average. I'm not really a big fan of the P/E ratio; earnings are the fuel for a company's success but this number doesn't take into account how efficiently the company turns earnings into cash and shareholder value. My favorite ratio is Price to Cash Flow because it plays a role in estimates of fair value that depend on discounted cash flow calculations. Wellpoint's is just 6.9 and, after looking into the company, I think its growth over the next few years will be higher than this number reflects.
Fourth quarter results, reported in late January, were favorable although the conference call indicated some expected reasons for concern, including an expected 1.5% decline in enrollment (much of this reduction is due to company strategy to improve their margins) as well as issues to do with health care reform (including about $100M in additional costs). A big issue had to do with the coverage of seniors, especially in California's Regional Preferred Provider Organization (PPO) which had a pre-tax loss of $150M; this product was not renewed for 2012. In mid-2011, Wellpoint purchased CareMore, which provides managed care to 54,000 seniors. Their expertise should improve confidence in the company's coverage of seniors and positions Wellpoint favorably compared to its competitors.
To shareholders' advantage, the company also stressed that it is improving their own processes and have lowered their SG&A to Sales ratio down to approximately 14%; Aetna's (NYSE: AET) is over 20% and UnitedHealth Group's (NYSE: UNH) is over 16%. In 2011 the company repurchased 12% of outstanding shares (using approximately $3B) and in 2012 they expect to use $2.5B to repurchase additional stock in 2012. The company forecasts EPS to grow by approximately 8.5% compared to 2011.
What interested me most was their planned new initiatives including their Quality Insights Hospital Program, patient-centered medical home programs which align incentives among patients, providers, and payers. Notably, they have innovative plans to increase use of technology in healthcare decision-making. In addition to Watson (which will be used with Cedars-Sinai for oncology), they have partnered with Verizon Wireless (NYSE: VZ) so that members can communicate via video with nurse case managers using their mobile devices. This kind of access sounds terrific for consumers when faced with puzzling medical issues.
Ultimately, Wellpoint looks promising as an investment: it appears to be undervalued, has a sizeable market share, and seems to be approaching future risks sensibly. However, it certainly faces all the uncertainty that goes with the health insurance industry including sudden regulatory changes that may be afoot and I don't think even Watson can help them with that!
Results for the first quarter, which is historically the strongest, are tentatively scheduled to be released in late April and bear watching.
Motley Fool newsletter services recommend UnitedHealth Group and WellPoint. The Motley Fool has no positions in the stocks mentioned above. msjeeves owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.