July 28, 2008
Revenue up, profits down -- that seems to be the mantra for health-insurance companies this quarter. UnitedHealth Group (NYSE: UNH ) said it last week, and Coventry Health Care (NYSE: CVH ) was hot on its tail with more of the same on Friday.
Coventry saw revenue grow an astounding 28%, thanks in large part to a 36% jump in the number of members enrolled in its Medicare programs since the year-ago quarter.
Unfortunately, that's where the good news ends. Like the other health insurers, Coventry is dealing with medical costs rising faster than it expected. The company shelled out 85.8% of premiums to pay for health services in the second quarter, compared to just 79.6% in the year-ago quarter. Those higher operating costs lead to a 45% drop in earnings.
The good news for the Stock Advisor pick is that all of this was expected. Coventry lowered guidance in June, and the $0.55 per share it earned in the second quarter was in that newly lowered range. Going forward, Coventry is looking for earnings per share of $3.65 to $3.75 -- just a little off the $3.98 it earned last year.
With its stock heading toward a 50% haircut since the beginning of the year, Coventry figured now was as good a time as any to deploy some of the cash it's been saving up. The company repurchased 1 million shares during the quarter and has the authority to repurchase almost another 10 million if the price remains right.
With Humana (NYSE: HUM ) , Aetna (NYSE: AET ) , and Cigna (NYSE: CI ) all off by at least 30% since the beginning of the year, expect buybacks from those companies as well when they report second-quarter earnings in the coming weeks -- in addition to a continuation of the “higher revenue, lower earnings” mantra.