Although it might seem counterintuitive, sometimes it's good from a shareholder's perspective for a company not to be operating at peak performance. After all, isn't it better to have a little room for improvement and optimism that the future could be even better?
With that notion in mind, I'd say that Motley Fool Stock Advisor pick Coventry Health Care (NYSE:CVH) continues to do pretty well and still has room to do even better. For the second quarter, this health-benefits provider grew revenue by over 26%, although the majority of that came from the inclusion of First Health. Without First Health, revenue growth was more on the order of 9%.
Looking at the commercial insurance business, there's good news and bad news. The bad news is that fully insured commercial membership was basically flat and the medical loss ratio for that business ticked up about 110 basis points (higher is bad). More positively, overall expense control still looks quite strong. I'm not inclined to worry too much about the membership or the medical loss ratio -- the company has previously guided toward pretty flat membership trends, and the medical loss ratio increase looks to be a momentary blip.
On the First Health front, there's still work to do. Membership declined modestly on a sequential basis, although there was some margin improvement. Everyone knew that this was a business that would need some time and work to bring up to Coventry's overall standards, so I don't see anything in those results that was really surprising.
Fools who only casually follow this sector should probably be aware that a lot of people expect the commercial insurance market to get tougher. With this increased competition, the general expectation is that it will become harder to add members and that price competition will further restrain growth.
Whether that's true or not, time will tell. For now at least, Coventry management is again raising its estimates. Membership growth hasn't been anything to write home about, but the company is seeing pretty respectable pricing, and overall operating margins continue to move up. Given the ongoing room for improvement at First Health, I would suggest that Coventry could continue to reap some earnings growth simply by enhancing its own internal returns.
Looking across the industry, Coventry has competitive margins, a good return on equity, and a reasonable valuation. It would perhaps be nice to see the company with a larger Medicare business (since that area seems to be working well for the likes of Humana (NYSE:HUM)), but that won't stop it from continuing to compete with the likes of Aetna (NYSE:AET), WellPoint (NYSE:WLP), and Motley Fool Stock Advisor pick UnitedHealth (NYSE:UNH).
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
