Health Care and Insurance and Banking & Finance

WellPoint gets warm welcome on market: Analysts see many reasons for stock's attractiveness

January 31, 2005

The new year dawned bright for WellPoint Inc., with the freshly formed company's stock price in the middle of what one analyst called "somewhat extraordinary" growth.

Shares for the insurer jumped nearly $8 apiece on Dec. 1 to close at $109.10 the first day they traded under the WellPoint Inc. name. Before that date, the shares traded under Anthem Inc. Steady growth continued from there.

The price hit a 52-week high Jan. 19 when it closed at $123.60, according to Bloomberg News. It slumped a few dollars last week and closed Jan. 25 at $118.50, still an increase of nearly 15 percent since Nov. 30.

Good market conditions, membership growth and the combined company's potential are among the elements attracting investors, according to analysts who cover Well-Point.

Anthem Inc. and WellPoint Health Networks Inc. finally completed their much-discussed marriage Nov. 30. That evening, Indianapolisbased Anthem announced it had purchased its California-based competitor in a deal valued at $20.8 billion.

The combined company was named WellPoint Inc. and Indianapolis became its headquarters.

Company President and CEO Larry Glasscock named senior leaders in December, and they've focused since then on blending the two organizations, said WellPoint spokesman Jim Kappel.

Analysts, meanwhile, have focused on updating their expectations for the company.

"Expectations about earnings weren't updated in researchers' minds and models and discussions out there until the deal got finalized," said Tom Carroll, an analyst with Baltimorebased Legg Mason Wood Walker Inc., which has provided investment banking services for WellPoint.

He said Anthem shares rose into the $90-per-share range before mergerrelated setbacks in California and other factors hampered their growth. The companies originally expected to complete the deal last summer, but the California Department of Insurance rejected it and caused a holdup that lasted until November.

Once analysts saw the companies finish the deal, the stock's perceived value moved up into the $115 to $120 per-share range. Carroll called the recent performance "basically a function of how the market prices stocks."

WellPoint shares have become an attractive buy for institutional investors, he said.

"It's a large-market cap, and institutional investors that want to be exposed to the managed care sector ... would rather invest in a large-market-cap company like Well-Point or United," he said, adding that these companies offer "more stability or predictability of earnings than perhaps a smaller company that can be more volatile."

Growing membership and a comfortable premium yield are among the factors analyst David Toung sees behind the growth.

As for membership growth, the companies should add at least 1.1 million members this year, JP Morgan analyst Scott J. Fidel predicted in a Jan. 11 report.

For premium yields, the two companies that formed WellPoint Inc. both had good reputations, said Toung, who works for New York-based Argus Research. Premium yields are the percentage difference between how much a company receives in premium revenue and what it spends in medical costs.

"When you put two strong companies together, you should continue to have one strong company," he said.

Toung said WellPoint has seen "somewhat extraordinary" growth since the deal was completed, but he noted that other large insurers like Hartford, Conn.-based Aetna Inc. and Minnesota-based United-Health Group have done well, too.

"The strong insurance companies are able to do a good job on their premium yield," he said. "They don't have to underprice to get more customers; they can price it profitably."

Earlier this month, WellPoint announced it was lowering earnings expectations for last year's fourth quarter. It also confirmed in the same announcement a profit projection of $7.75 per share for 2005, an increase from the 2004 full-year projection of $6.07.

That announcement added to the stack of positive research notes that have piled up about the company since December.

In a Jan. 10 report, Raymond James & Associates Inc. analyst Michael J. Baker gave WellPoint an "outperform" rating, meaning the stock should appreciate and outperform the Standard & Poor's 500 index over the next year.

Fidel noted in a Dec. 16 report that the company has started integrating its local health care plans into larger regional segments. This, he wrote, "should begin the process of transforming WellPoint into a truly national player" and help it reach goals for savings created by the merger.

Those goals still stand at $150 million this year and more than $250 million per year starting in 2006, according to Kappel.

Ellen Wilson thinks the company will do better than that. The analyst for Sanford C. Bernstein & Co. predicted that WellPoint should hit $250 million in savings this year and $471 million in 2006. The latter total is nearly twice WellPoint's projection.

A report published last month by Wilson called WellPoint's savings estimates "extremely conservative."

Earlier this month, Wilson upgraded Well-Point to "outperform," which means it will outpace the market index by 15 percentage points this year. Last month, her New Yorkbased company raised its target share price on WellPoint from $123 to $133.

John Rex set a target price of $135 per share for the end of 2005, according to a Jan. 10 report. The Bear Stearns & Co. Inc. analyst predicts organic membership growth above the industry average due to better provider contracting leverage. New Yorkbased Bear Stearns lists WellPoint as a noninvestment banking client in its disclosures.

He wrote that he considers WellPoint "one of the best-positioned health plans in the industry."
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