Coventry Health Care Inc. (CVH) reported first-quarter 2012 operating earnings per share of 62 cents, which lagged the Zacks Consensus Estimate by a penny and was also lower than the prior-year earnings of 66 cents. Operating income amounted to $88.3 million in the reported quarter.
The decline was primarily attributable to increased expenses coupled with a decline in membership in Commercial Group Risk that marred the desired upside in the top line. However, revenue showed impressive growth, partially offsetting the increase in expenses.
The earnings per share for the reported quarter exclude the favorable impact of 58 cents related to the release of Medicare Advantage Risk Adjustment Data Validation (RADV) audit reserves, while the prior-year quarter’s results exclude earnings of 8 cents per share related to the Medicare Advantage Private Fee-for-Service (MA-PFFS). Including the impact of the non-recurring items, Coventry reported net income of $170.7 million or $1.20 per share in the reported quarter, compared with $110.2 million or 74 cents per share in the prior-year quarter.
Operating revenues in the reported quarter surged 21% year over year to $3.7 billion, surpassing the Zacks Consensus Estimate of $3.47 billion. Managed care premiums increased 22.8% year over year to $3.39 billion, while revenues from management services climbed 4.1% to $305.7 million.
Coventry witnessed year-over-year growth of 18.7% in total operating expense to $3.42 billion. Additionally, medical costs, the major operating expense component, increased to $2.81 billion from $2.28 billion in the prior-year quarter.
Likewise, Coventry’s selling, general and administrative (SG&A) expenses increased to $502.9 million from $498.6 million a year ago, while cost of sales remained unchanged at $68 million. Depreciation and amortization (D&A) expenses increased marginally to $36.3 million from $35.8 million in the year-ago quarter.
Total membership witnessed a growth of 497,000 from the fourth quarter of 2011 to 5,262,000 in the reported quarter. Membership growth was driven by higher enrollment in Medicare Advantage, Medicare Part D and Medicaid products.
Commercial Group Risk: The Commercial Risk membership for the reported quarter was 1,549,000, down 87,000 members from the prior-year quarter. Commercial Risk Medical Loss Ratio (MLR) in the reported quarter came in at 79.9%.
Medicare Advantage Coordinated Care Plans (MA-CCP): Coventry reported MA-CCP membership of 250,000, showing an increase of 31,000 members from the first quarter of 2011. The MA-CCP MLR came in at 74.1%.
Medicare Part D: Medicare Part D membership stood at 1,458,000 at the end of the reported quarter, up by 299,000 members over the prior-year quarter. The Medicare Part D MLR in the quarter came in at 94.9%, against 95.8% in the prior-year quarter.
Medicaid: The Medicaid membership at the end of the reported quarter stood at 924,000, which reflected an increase of 456,000 members over the first quarter of 2011. The Medicaid MLR in the quarter came in at 100%.
Balance Sheet and Capital Structure
Coventry ended the reported quarter with approximately $1.74 billion in cash and cash equivalents, up from $1.58 billion at the end of 2011. Deployable cash at the parent company stood at $900 million at the end of March 2012. Operating cash flow totaled $420.5 million at the end of the reported quarter.
As of March 31, 2012, Coventry had total assets of $9.02 billion and shareholders’ equity of $4.70 billion. The company exited the reported quarter with $1.58 billion in long-term debt, almost at par with 2011 end.
Business Highlights
During the quarter under review, Coventry won various Medicaid contracts. The state of Nebraska awarded a Medicaid managed care contract to the company, which is due to begin in the third quarter of 2012. The state of Missouri also renewed its Medicaid contract with Coventry, which is set to commence on July 1, 2012.
Moreover, the Commonwealth of Pennsylvania HealthChoices Medicaid program in the New West and New East zones sent Letters of Intent to the company with a view to initiate their contracts on September 1, 2012 and March 1, 2013, respectively.
Dividend Update
Coventry initiated a quarterly cash dividend policy in the reported quarter. Consequently, on April 9, 2012, the company paid its first quarterly dividend of 12.5 cents per share to the shareholders of record as of March 23, 2012.
Outlook for 2012
Coventry affirmed its 2012 earnings per share guidance of $3.10-3.30. Projection for risk revenue was raised to $12.875-13.050 billion from $12.75-12.90 billion, while the guidance for the management services revenue was increased to $1.145-1.180 billion from $1.11-1.15 billion.
The company also increased its consolidated revenue guidance range to $14.020-14.230 billion from $13.86-14.05 billion. Coventry’s consolidated MLR is expected to be between 83.6% and 84.4% compared with the previous guidance of 83.1% to 83.9%.
Coventry anticipates the cost of sales expense to lie in the range of $251-257 million, up from the earlier projection of $231-237 million. The company also projects SG&A expenses to be in the range of $2.09-2.13 billion, D&A between $138-142 million and interest expense in the range of $99.0-101.0 million in fiscal 2012.
Coventry’s other income is projected between $87 million and $93 million, while tax rate is estimated in the 37.7-38.3% range. Shares outstanding at year end are expected to be in the range of 138-142 million.
Peer Take
Coventry’s competitor, WellPoint Inc. (WLP) reported first-quarter 2012 adjusted income of $2.34 per share, surpassing the Zacks Consensus Estimate of $2.28 per share but a penny lower than the year-ago earnings. Adjusted income declined 11% to $794.1 million from $891.0 million in the first quarter of 2011.
Another peer, UnitedHealth Group Inc. (UNH) declared first-quarter 2012 earnings of $1.31 per share, substantially higher than the Zacks Consensus Estimate of $1.16.
Coventry carries a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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