Rumors can be the bogeyman of long-term investors -- or at least those who'd like to be long-term investors. Before Thursday's earnings release, Aetna (NYSE:AET) shares had dropped more than 10% in less than a month as analysts and investors passed around rumors that results would be soft.
For those who ignored the noise, the results posted Thursday were a nice affirmation. Revenue climbed 13% for the quarter, and this large health-plan provider added 60,000 members, bringing the total to 14.4 million overall. Stripping out some positive reserve benefits, Aetna posted 27% growth in operating earnings.
One of the keys to the company's recent operational success has been the relatively tame environment for health-care costs. As opposed to the company's prior outlook of 8.5% growth in medical costs, it now seems that costs will only grow about 8% to 8.5% for the year. I realize that 0.5% doesn't sound like a big difference, but when you spend more than $3 billion a quarter in health-care expenses, that small difference can be a large one in absolute dollars.
With well-contained costs, Aetna's commercial medical cost ratio (commercial costs divided by commercial revenues) for the quarter was 78.9 versus 79.1 one year ago. That's a solid result -- on par with the likes of industry titan UnitedHealth (NYSE:UNH).
No doubt the health-care insurance market is changing. UnitedHealth has become even bigger with its acquisition of PacifiCare (NYSE:PHS), and there's a sizable gap between the "big four" of UnitedHealth, WellPoint (NYSE:WLP), Aetna, and CIGNA (NYSE:CI) and the next tier of Coventry (NYSE:CVH), Humana (NYSE:HUM), and the like.
There's rampant speculation that further industry consolidation lies ahead, and Aetna has been identified as a potential buyer of one of the mid-tier companies. I wouldn't hold my breath on that -- Aetna doesn't seem to enjoy big deals and would apparently rather keep its acquisitions below $500 million. That's OK to a point -- big deals mean big risks -- but Aetna may find it hard to keep up with the Joneses if a competitor like CIGNA does a large deal.
Aetna's stock still looks pretty interesting. While perhaps not the biggest or the best in the field, its current valuation would seem to be assuming more price competition and health-care expense than management currently sees. It's hard for me to recommend not buying the best company in an industry, but Aetna's relative valuation would seem to at least make it worth a second look for now.
For more insurance Takes, see:
- A Health-Care Sequoia
- UnitedHealth Swallows PacifiCare
- Aetna Gets Active
- Coventry Keeps Turning Heads
UnitedHealth and Coventry are Motley Fool Stock Advisor selections. For more advice from Tom and David Gardner on how to perk up your portfolio, click here.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
