Back in February, Aetna (NYSE:AET), one of the nation's largest health insurers, traded at its 52-week high of $52.48, following the release of strong 2005 Q4 results. The investor enthusiasm was short-lived. The company's stock tanked following its 2006 Q2 results, which indicated both falling membership and rising medical costs. While the recent shift in political power on Capitol Hill will present some uncertainties to the health insurance industry going forward, Aetna has begun to rally from the $30.94 share price it hit for a 52-week low following the release of its Q2 results at the end of July.
Several factors have played a role in this turnaround, one being an impressive third quarter. On Oct. 26, Aetna announced that its operating earnings, excluding prior-period favorable reserve development, surpassed its year-ago quarter by 34%. Third-quarter net income was $0.85 per share, a 37% increase over the prior-year quarter. Because of the strong results, the company was able to revise its full-year forecast for its operating EPS to $2.83 from previous guidance of $2.77-$2.79. Ronald A. Williams, Aetna's chairman and CEO, sees another big year in 2007 as well. He noted, "Looking ahead, we believe that 2007 will be yet another year of increasing profitability and growth for Aetna. We project our operating earnings per share to increase by 15% to $3.26."
Other key strategic decisions that Aetna made during the third quarter to enable the turnaround in its stock price included a share repurchase, aggressive marketing, and streamlining its operations. Aetna repurchased 27.4 million shares at a cost of $973 million during the third quarter. Year to date, it has repurchased 51.6 million shares at a cost of $1.96 billion. This has lowered the company's diluted share count by more than 6% since the end of last year.
Its aggressive marketing campaigns have added more than 700,000 members in the past year. The company also made the decision during the third quarter to "right-size" its workforce. Aetna laid off 650 employees -- or 2% of its personnel -- in October, in an attempt to trim administrative costs. The company also has begun to pass rising medical costs on to the consumer, as it attributed premium and fee rate increases as playing a factor in its strong third-quarter earnings.
Since Tuesday's midterm elections, some analysts have raised concerns about the implications of a Democrat-led Congress. Aetna and other insurers, such as WellPoint (NYSE:WLP), UnitedHealth (NYSE:UNH), and Cigna (NYSE:CI), all opened down on Wednesday immediately following the election results. Concerns focus on the possibility of insurers having to take on a greater responsibility in terms of paying more for Medicare drug benefits. Other analysts believe that the pullback we have seen this week might only be temporary. In either case, the company's strong fundamentals and share repurchase program are positive signals for shareholders. And despite the election results, Aetna is still presently trading 28% higher than its Aug. 1 low, and shareholders can also look forward to strong operating results in 2007.
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Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Fool has a disclosure policy.
