In a major disappointment, Aetna (AET) lowered its outlook for 2010, which sent its shares down by 6.51% on Tuesday to close at $30.61. Aetna expects its 2010 operating earnings to be lower than its 2009 earnings, expected to come in at $2.76 per share. The lower than expected forecast is primarily based on the apprehension that companies might cut back plan benefits to keep costs under control. In addition, the possibility of lower medical reimbursements made Aetna slash its outlook. We are awaiting detailed guidance once the company releases fourth quarter earnings next month.
The current state of the global economy and market conditions are quite challenging with high levels of unemployment, diminished business and consumer confidence and volatility in both the US and international capital and credit markets. Membership has slumped throughout the health insurance sector as employers have cut jobs thereby leading to a reduction in the number of people covered by employer-sponsored plans.
Although Aetna’s healthcare membership during the third quarter improved compared to the year ago period, it declined sequentially. We believe that given the current situation, membership is likely to decline further sequentially in the near future. This will have an adverse impact on the company’s profitability.
While we are pleased with Aetna receiving the TRICARE contract (approximately worth $16.7 billion over five years) of the North region, we remain concerned about the current litigation revolving around it. Health Net (HNT), one of Aetna’s competitors, used to serve this area under the previous contract. However, unable to get the contract renewed, Health Net filed a protest with the Government Accountability Office (GAO) citing certain irregularities in the proposal evaluation and award decision and other factors. A final decision regarding the contract is yet to be taken. An unfavorable outcome will hamper Aetna’s outlook going forward. Given the scenario, we have an Underperform recommendation on the stock.
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