The Aetna Way
vikash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Aetna Inc. (NYSE: AET) ,domiciled in United States, operates as a diversified health care benefits company. The company functions through three segments: Health Care, Group Insurance, and Large Case Pensions.
The recent approvals received by the company to acquire Coventry health care persuaded me to pen down on Aetna - a stock that investors are eyeing upon. Aetna‘s pretax operating margins (average 8.6%) are amongst the highest in the managed care sector.
Before the FY2012 results due January end, Aetna confirmed its 2013 operating earnings forecast of at least $5.40 a share and revenues up by 9% in 2013. The company views its 2012 operating earnings to be about $5.10 a share. The revenue for FY2012 is projected at about $35.5 billion (growth of 6% y-o-y), as the nation's third-largest health insurer's medical plans to add more members.
The strategically convincing acquisition of Coventry heath care places Aetna in a very strong position and improves its reach in exchange based business relative to its peers. The Medicare and Medicaid segments of Aetna appear to benefit the most as a result of this acquisition. Not only is the Coventry acquisition strategically compelling, it is financially very attractive. The management projects the operating EPS to be modest in 2013 but beyond that it looks to be highly accretive. The 2015 ROIC is expected to be in double digits, the ROE might be in high teens.
Aetna 2010-2013 operating EPS CAGR growth of 13.6%, higher than its peers, lures investors to a great extent. Its differentiated strategy can create completive advantages and drive portfolio growth. One should invest in a company like Aetna because of its positioning and diversified portfolio that can enable the company to produce higher results. A company that targets double digit operating EPS growth on an average sends positive signal to investors, in this challenging financial scenario.
Aetna focuses on creating shareholders’ value. It has been a leader in effective capital management. The company has already repurchased 33% of its outstanding shares in the last 5 years and has committed to deploy over $9 billion of capital in last 2 years. The dividend yield is expected to be 1.8% by 2013, with an increase in quarterly dividend from $0.15 to $0.20. The strategic pillar at Aetna duly addresses the external environment. In order to meet the consumer needs, the company is re-engineering its business platforms from indemnity medical plans in 1970s and open access plans in 2000s to aligned, integrated care in 2012. This will definitely lead the way for an upside for Aetna. The company is planning to enter into collaborative risk sharing arrangements with providers in order to receive the best price. This would prove to be very cost effective for them and would further enable them to launch new insurance products in the market.
To summarize Aetna as a company has a sustainable margin profile with strong capital generation and deployment. The company has minimal health reform impact and its national accounts are positioned for growth. The long term growth target of 10% holds good.
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