Undervalued Wellpoint Finally Set to Rally
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WellPoint (NYSE: WLP) is one of the largest health insurers and has recently made some strategic acquisitions that position it well for the future. I favorably described WellPoint six months ago, and, to my chagrin, watched its share price collapse by over 12%.
Unsurprisingly, shareholders were frustrated and after five years at the helm, Angela Braly stepped down on August 28. The Board named John Cannon, the General Counsel, as the interim CEO stated “Time will prove the wisdom of potentially transformative actions taken under Angela’s leadership.”
Under Braly’s recent leadership, the company acquired CareMore Health group, which provides managed care to over 50,000 seniors and is in the process of purchasing the Amerigroup Corp (NYSE: AGP) a Medicaid-focused insurer. Both of these deals position the company for more government business through Medicaid and Medicare. In addition to these acquisitions, they also have introduced some innovative health care programs with wireless technology and are one of the first to utilize IBM’s artificial intelligence system, Watson.
However, she also participated in some controversial and unpopular decisions. In 2010, during the national discussion on healthcare reform, WellPoint tried to raise rates in California by as much as 39%, a move deemed “arbitrary and capricious” by Consumer Watchdog. Last year, the company surprised Wall Street with unexpectedly high Medicare claims that cut into earnings by 8%. Just last month, the company had to lower its guidance for this year to $7.30-$7.40/share because of increases in medical costs. Attempts to work with hospitals over these costs resulted in WellPoint being named the least popular carrier amongst hospital executives, according to a recent poll. Its favorability rating was just 27%, in contrast to Cigna (NYSE: CI) at 71% and Aetna (NYSE: AET) at 60%.
While the Board supported Braly until the end, shareholders had become increasingly frustrated with the company’s performance. Hedge Fund Royal Capital Management, which owns over 800,000 shares, sent an open letter to Board last week claiming that Braly had “failed miserably.” In the last year, shares have fallen 7%, compared to the UnitedHealth Group (NYSE: UNH) rise of 17%.
Cannon has been a key figure in the Amerigroup acquisition and his position as the interim CEO will make sure that key transaction continues smoothly. He has already stated that he is not interested in the permanent position. Consequently, there are already speculations that James Carlson, the Amerigroup CEO, could take the helm.
Despite any uncertainties in the health care industry, at current levels the company is trading at a deep discount. At a share price of $60 (down from a 52-week high of $75), its Price to Book ratio is 0.8 and Price to Cash Flow is in the single digits. In addition to a quick rally from the news (shares were up a few percent in afterhours trading), I expect a longer-term favorable response to this catalyst.
msjeeves has no positions in the stocks mentioned above. The Motley Fool owns shares of WellPoint. Motley Fool newsletter services recommend Amerigroup, UnitedHealth Group, and WellPoint. 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.If you have questions about this post or the Fool’s blog network, click here for information.