Weekly Stock Call

January 20, 2011
Current Price – US$61.56

WellPoint, Inc. (WLP) is the largest U.S. health benefits company in terms of medical membership, serving 33 million medical members through its affiliated health plans and a total of 70 million individuals through all subsidiaries and is second largest in terms of revenue ($US B 65 FY09). The company had grown aggressively through 2007 both organically and via acquisitions and mergers, but recessionary conditions have since hampered growth. It appears that the market is currently excessively discounting expected future earnings of the company based on uncertainty regarding the timing and pace of economic recovery in the U.S. and on the impacts of possible health care reforms on revenues and margins going forward.

In an industry that has seen considerable consolidation, WLP has emerged as a significant competitive presence having captured economies of scale in negotiating terms with both health services providers and within its marketing/distribution chain. The company also boasts strong industry ratings and holds exclusive rights to market products under the BlueCross BlueShield brands in its most significant markets.

Despite facing likely regulatory pressure on earnings and possible resistance to continued growth through further industry consolidation, and barring some unanticipated massive draw on health care services (i.e. a severe pandemic or widespread terrorist action), it appears that the company is on a solid financial footing (good interest coverage and manageable debt levels) and is trading at an attractive price. Ownership of a share in this company might also be expected to offer the individual investor a degree of hedging against potential increases in health care costs. The company does not pay a dividend, but has instead returned earnings to shareholders through opportunistic public market stock repurchases in recent years.


Valuation

Based on a blend of valuation methods (discounted cash flows and historical and industry price ratios) I arrive at a current valuation for WellPoint, Inc. of US$98.84

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield       60.6%
Dividend yield   0.0%
Total return     60.6%


Risks

Listed below are some of the key risks faced by the company. This list is by no means comprehensive. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Health Care Regulation and Reform – in light of current U.S. political and fiscal conditions government regulation could be implemented effectively limiting revenue growth and profit margins of health benefits companies.

Economic Conditions – a prolonged or deepening economic downturn could further erode membership, reduce revenues from premiums and adversely impact earnings.

Large Scale Medical Emergencies - may result in unexpectedly high benefit claims and have a material adverse effect on earnings.


The Numbers

Share Price ($US)   61.56 
Market Cap ($US B)   24.2 
No. Shares (M)   433 
ROE   21.5%
ROA   10.1%
P/E Ratio   5.3
Price/Sales Ratio   0.37
Price/Book Ratio   1.0
Current Ratio   1.9
Interest Coverage   19.0
Total Debt/Equity   34.0%


Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.


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