WellPoint (NYSE:WLP) reported fourth-quarter earnings and full-year results today. While the overall results looked good to this Fool, there is another data point that indicates costs might be rising for health-care providers.
But first, a look at the results. Revenues for the quarter were $14.3 billion, slightly lower than analyst consensus of $14.5 billion. Earnings per share, however, topped estimates by a penny at $1.28 per diluted share for the quarter, a 23% increase over fourth-quarter 2005. Member enrollment for the year, which is a fundamental driver of the company's growth, was up only slightly at 34.1 million members, compared to 33.9 million members as of the end of 2005.
It seemed, however, that the sticking point -- as evident by the focus of the analysts' questions during the conference call this morning -- was the medical loss ratio (MLR). The MLR increased 50 basis points on a comparable basis from fourth-quarter 2005. The company didn't achieve 50 basis points of improvement over the third quarter, as management had previously guided. The rise in the MLR is a warning that either less profitable underwriting is taking place, or costs are rising faster than anticipated. Either way, as I previously discussed in the UnitedHealth Group (NYSE:UNH) earnings release, any rising trend in costs is not a good sign for future profit margins, especially in a cyclical business like health insurance.
That said, WellPoint was able to continue to leverage its scale and decrease its overall SG&A by 100 basis points to 15.7%. The company also expects that this trend will continue into fiscal 2007. As for the rest of 2007, management held to most of the expectations it outlined in last month's investors' conference.
WellPoint also showed significant profitability by spending $4.6 billion in share buybacks for the year, which reduced share count by 9.6% while maintaining a consistent debt-to-total capital ratio.
Foolish last words
Even with a decent operating performance, positive growth, and strong cash flows, the market has decided to take a more pessimistic attitude with WellPoint, which was down in pre-market trading. For that matter, WellPoint, along with its peers Aetna (NYSE:AET), UnitedHealth Group, and Coventry Health (NYSE:CVH), has struggled to gain traction in the market over the past year.
Regardless, with any significant drop in share price, WellPoint could offer up a compelling value.
For related Foolishness:
UnitedHealth is an Inside Value and Stock Advisor recommendation. Coventry Health is a Stock Advisor selection.
Fool contributor Matthew Crews welcomes your feedback -- really! He has no financial position in any of the companies mentioned. The Motley Fool has a disclosure policy.
