WLP Market Research & Analysis Report
Updated Oct 8, 2014

Growth and Balance Sheet

The company reported net income of $731 million, or $2.56 diluted earnings per share, for the second quarter of 2014 ending June 30. That's down from a net income of $800 million, or $2.64 diluted earnings per share for the same quarter last year. Operating revenues for the second quarter were $18,230 million, up from $17,491 million for the same quarter last year. Medical enrollment totaled around 37.3 million members as of June 30, 2014, an increase of circa 1.6 million members as of June 30, 2014. All of company’s segments recorded positive growth in revenues in comparison to the same quarter last year. Commercial and Specialty business segment revenue was up 1.7% to $9,965 million, however, operating revenue was down 3% to $919.6 million primarily due to increased expenses reflecting continued spending in connection with Health Care Reform. Government business segment revenue was up 7.4% to $8,259 million, primarily due to enrolment growth. Other segment revenue was up 9.6% to $5.7 million. The benefit expense ratio was 82.7%, an improvement in comparison to the same quarter last year ratio of 83.9%. The SG&A expense ratio for the quarter was 15.8%, in comparison to 13.9% for the same quarter of 2013. The deterioration is primarily due to new fees related to Health Care Reform. Cash flow provided by operating activities for the six months ended June 30 2014 was $2,459 million, in comparison to $1,382 million for the same period last year. Cash, and cash equivalents as of June 30, 2014 were $1,785 million in comparison to $1,582 million as of December 31, 2013. WLP forecasted third quarter of 2014 EPS are in the range of $2.10 to $2.61, compared to actual EPS of $2.16 for the third quarter of 2013. The financial strength indicators of the company are lagging behind the industry averages. Company’s long term debt to equity ratio is 57.59 and the industry average ratio is 18.90. The interest coverage ratio of 7.87 is at worse levels than the industry average of 54.25, however, it is still at satisfactory levels. In terms of efficiency, the asset turnover ratio of 1.18 is much better than the industry average of 0.15; the ROA of 3.91 is at better levels than the industry average of 0.86; and the ROE of 9.75% is in line with the industry average of 9.99%. 

Valuation

WLP PE stands at 14.47 below the industry average of 19.35, and below the stock market average represented by the S&P 500 average of 18.79. The company is currently trading below the maximum P/E ratio of 15x, and over the last five years, the company’s shares have traded in the range of 4.38 to 15.88x trailing 12-month earnings. WLP's current Price/Sales of 0.45 is below the average of its industry of 1.72. WLP’s head to head comparison to its main competitors show that the company has the lowest gross margin, and below the industry average. The achieved operating margin is again the worst result out of the selected peers, but in line with the industry average. The quarterly revenue growth of the company is also the lowest result in comparison to the main competitors, and below the industry average. WLP trades at one of the highest P/E ratio out of the selected peers, but not by much.  However, the company trades at the lowest P/S ratio WLP’s twelve trailing months EBITDA is $5.04 billion above the industry average of $296.90 million. The stock is currently trading below its intrinsic value of $127.99, this suggests that the stock is currently undervalued at these levels. The beta of 0.50 implies lower volatility of the stock with respect to the S&P 500. WLP has shown favorable earnings consistency over the last five years. Moreover, its earnings have increased by 12.73% over the last five years. The current quarter earnings in comparison to the same quarter last year have decreased by 3.03%. WLP’s Total Debt/Equity of 60.70 is above the required maximum, and it is above the industry average of 50.8. WLP’s current price levels are below the maximum level, 5.67% below the 52 week high of $124.58, and the technical analysis give neutral to positive view of the stock. WLP has a dividend payout ratio of 21% and a trailing annual dividend yield of 1.40%.

About WLP

WellPoint, Inc. (WellPoint) is a health benefit company in terms of medical membership in the United States. The Company manages its operations through three segments: Commercial, Consumer, and Other. The Company is an independent licensee of the Blue Cross and Blue Shield Association (BCBSA), an association of independent health benefit plans. The Company offers a spectrum of network-based managed care plans to the large and small employer, individual, Medicaid and senior markets. Its managed care plans include preferred provider organizations (PPOs); health maintenance organizations (HMOs); point-of-service plans (POS) plans; traditional indemnity plans and other hybrid plans, including consumer-driven health plans (CDHPs); and hospital only and limited benefit products. In February 2014, WellPoint sold its online contact lens retail subsidiary 1-800 CONTACTS to private equity firm Thomas H. Lee Partners.

Competitor Comparison

WellPoint Inc. (NYSE:WLP) N.V.

Highlights

WellPoint, Inc., a health benefits company, through its subsidiaries, provides a range of medical products in the United States. The stock closed yesterday’s trading session at $117.52. In the past year, the stock has hit a 52-week low of $81.84 and 52-week high of $124.58. The intrinsic value of the stock is above the current price. WLP has a market cap of $32.23 billion and is part of the Healthcare sector.

• Diverse product portfolio addressing the needs of large customer base
• Broad customer base providing competitive advantage
• Acquisition of Amerigroup strengthened WellPoint’s customer base

• High level of indebtedness may affect financial flexibility
• Dependence on dividends from subsidiaries  

WLP Intrinsic Value

Stock Valuation Model & Intrinsic Value Definitions

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. WLP's 52 week high is $124.58, current price is $117.52, is 5.67% below the 52 week high.

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be "moderate", which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.  The company has a P/E ratio of 14.47, the average industry P/E ratio is 19.35 and is below the S&P 500 P/E ratio of 18.79.

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own 0.38% of WLP stock. Management's representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

WLP is trading in the range of $116.87 - $124.58 in the past 30 days. The stock has been showing support around the level of $108 and resistance in the $125 range. The stock is trading above the 50-Day Moving Average and above the 200-Day Moving Average. The RSI(14) is 46.70. After the consolidation period, the stock exploded in March and has made new all-time highs. Most recently, the stock has contracted back but it seems that has found support around the previous resistance level, at around $117. The pullback might be a good opportunity to buy the stock cheaper. Our indicators give a neutral to positive view of WLP.

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Investor’s sentiment for the stock.

The model assigns a value according to analyst’s recommendation for the stock. Analyst rating on Reuters.com is 6 Buy, 2 Outperform, and 14 Hold.

We are searching for EPS numbers that are better than the previous year's. One dip is allowed, but the following year's earnings should be higher than the previous year. WLP’s annual EPS for the last 5 years were 9.88, 6.94, 7.25, 8.18, and 8.20 this type of earnings action is favorable.

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry. WLP’s Total Debt/Equity of 60.70 is above the required maximum, and it is above the industry average of 50.8.

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a "good" growth company. Stocks with improving earnings are worthy of your extra attention. WLP’s EPS growth for this quarter relative to the same quarter a year earlier is -3.03%, below our target.

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%. WLP’s annual earnings growth rate over the past five years is 12.73%, below our target.

¹Tradespoon Score and Outlook: This score conveys Tradespoon’s long-term outlook of 1 to 5 years for a particular stock. Tradespoon uses proprietary methods to rate its trading picks on a scale from 1 to 10, with a 10 being the most favorable expected risk and return outlook. To determine a stock’s rating, Tradespoon uses an advanced algorithm that factors in fundamental and technical analysis to determine a stock's expected risk and return.