Coventry Health Care Inc. (CVH) reported its fourth-quarter adjusted earnings of $142.1 million or 96 cents per share, exceeding the Zacks Consensus Estimate of 89 cents. Full year 2010 earnings were $546.4 million or $3.70 per share, which also surpassed the Zacks Consensus Estimate of $3.61.
Coventry’s adjusted earnings in the fourth quarter excludes the favorable impact of 5 cents from the Medicare Advantage Private Fee-for-Service (MA-PFFS) product, while full-year earnings excludes the favorable impact of 45 cents from the MA-PFFS product and an unfavorable impact of $1.18 per share from the previously announced Louisiana provider class action litigation. The Medicare offering stands discontinued from January 1, 2010.
Including the impact of this item, Coventry reported net income of $150.3 million or $1.01 per share in the fourth quarter as opposed to $109.1 million or 74 cents per share in the prior-year period. Net income in the fiscal 2010 was $438.6 million or $2.97 per share, as against the net income of $242.3 million or $1.64 per share in fiscal 2009, which included loss from discontinuing operations and provision for income taxes.
The improved showing was due to continued emphasis on cost containment throughout the organization and excellent liquidity position.
Behind the Headlines
Total operating revenues in the reported quarter declined 12% year over year to $3.03 billion, but exceeded the Zacks Consensus Estimate of $2.99 billion. Coventry’s operating revenues in fiscal 2010 also plummeted 17% year over year to $11.59 billion, but exceeded the Zacks Consensus Estimate of $11.56 billion.
During the fourth quarter, managed care premiums decreased 13% to $2.73 billion, while revenues from management services declined by 4% year over year to $294.6 million. Similarly, Coventry’s managed care premiums in fiscal 2010 plunged 18% year over year to $10.41 billion, while revenues from management services declined by 1% year over year to $1.17 billion.
Coventry witnessed total operating expenses for the reported quarter of $2.79 billion, down 14% from the year-ago quarter. Medical costs, the major operating expense component, fell 17% to $2.16 billion. Though Coventry’s cost of sales jumped in the quarter, selling, general and administrative expenses (SG&A expenses) and depreciation and amortization (D&A) dropped over the said period.
Total operating expenses were $10.90 billion in the fiscal 2010, down 19% fyear over year. Medical costs also declined 24% to $8.27 billion. Coventry’s cost of sales surged 5% in fiscal 2010; however, SG&A expenses and D&A fell 9% and 6%, respectively in the reported year.
Total membership in the quarter increased 4.4% to 5.1 million from the prior quarter.
Health Plan Commercial Group Risk: The Health Plan Commercial Risk membership for the reported quarter was 1,641,000, an increase of 223,000 from the prior-year quarter of 1,418,000. Health Plan Commercial Risk premium yields in the reported quarter climbed to $316.34 per member per month (PMPM), up 3.1%. The Health Plan Commercial Group Risk MLR in the quarter came in at 81.3% as against 82.9% last year.
Medicare Advantage Coordinated Care Plans (MA-CCP): Coventry reported MA-CCP membership of 224,000, against 186,000 in the year-ago quarter, primarily driven by the acquisition of Mercy Health Plans which closed on October 1, 2010. MA-CCP premium yields in the reported quarter climbed to $857.39 PMPM, up 0.9%. The Medicare Advantage MLR came in at 84.1%, compared to 89.4% a year ago.
Medicare Part D: Medicare Part D membership stood at 1,628,000 at the end of the reported quarter, against 1,683,000 million in the year-ago quarter. Medicare Part D premium yields in the reported quarter climbed 2.8% to $85.74 PMPM. The Medicare Part D MLR in the quarter came in at 64.7%, against 64.4% in the prior-year quarter.
Medicaid Risk: The Medicaid membership at the end of the reported quarter stood at 468,000, which reflected an increase of 66,000 members from the year-ago quarter, largely driven by new markets in Nebraska and Pennsylvania. Medicaid premium yields in the reported quarter increased 2.3% to $223.54 PMPM. The Medicaid MLR in the quarter came in at 85.4%, against 85.8% last year.
Evaluation of Balance Sheet and Capital Structure
Coventry ended the quarter with approximately $1.85 billion of cash and cash equivalents. The company had approximately $850 million of deployable free cash at the parent in the reported quarter.
Furthermore, Coventry exited the quarter with $1.6 billion in long-term debt, with debt to capital of 27.6%.
As of December 31, 2010, Coventry had total assets of $8.50 billion and shareholders’ equity of $4.20 billion.
Comparisons with Competitors
Rival company Unitedhealth Group, Inc. (UNH) reported fourth-quarter results on January 20, 2010. Income from continuing operations was 94 cents per share, substantially better than the Zacks Consensus Estimate of 90 cents. Full year EPS of $ 4.10 surpassed the Zacks Consensus Estimate of $3.99.
Aetna Inc. (AET) reported fourth-quarter profit from continuing operations of 63 cents per share on February 4, well ahead of the Zacks Consensus Estimate of 61 cents. Full-year 2010 core operating earnings were $3.68 per share, ahead of the Zacks Consensus Estimate of $3.63.
WellPoint Inc. (WLP) reported fourth-quarter results on January 26 with income from continuing operations of $1.33 per share, surpassing the Zacks Consensus Estimate of $1.21. WellPoint also posted its earnings of $6.74 per share in FY10, surpassing the Zacks Consensus Estimate of $6.60.
Outlook for 2011
For fiscal 2011, Coventry expects to earn between $2.50 and $2.70 per share, excluding the impact from MA-PFFS as well as other one-time charges.
Coventry projects risk revenue of $10.35 billion to $10.80 billion and management services revenue of $1.16 billion to $1.19 billion for fiscal 2011.
The company expects its consolidated revenue guidance to a range of $11.51 billion – $11.99 billion. Coventry’s consolidated MLR is expected between 82.0% and 82.8% in fiscal 2011.
Coventry anticipates cost of sales in the range of $255.0 million to $263.0 million, with SG&A expenses in the range of $2.00 billion to $2.04 billion, D&A between $135.0 million and $141.0 million, and interest expense in the range of $80.0 million to $85.0 million in fiscal 2011.
Coventry’s other income is expected to range between $69.0 million and $74.0 million in fiscal 2011.
Shares outstanding at year end 2011 are expected to be 147.0 million to 150.0 million.
Our Take
Coventry has a solid fundamental business and continues to grow with all seven core businesses performing at or above internal expectations. Further, we believe that Coventry is also growing on the acquisition front, as it is making continuous efforts to expand its footprint in Missouri and Arkansas.
On October 1, Coventry completed the acquisition of Mercy Health Plans (“MHP”) and its subsidiaries from Sisters of Mercy Health System for an undisclosed amount. Coventry said the acquisition is expected to be slightly accretive to its 2011 earnings and will serve more than 1.2 million members in its six-state Midwest region.
We believe that Coventry’s acquisitive growth strategy will help it to leverage its regional service centers and improve operating efficiencies, largely through economies of scale.
We maintain a Neutral recommendation on Coventry in the long term. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
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